<PAGE>
As filed with the Securities and Exchange Commission on April 30, 1996
File No. 33-23166
811-5624
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM N-1A
REGISTRATION STATEMENT (NO. 33-23166)
UNDER
THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 29
and
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
Amendment No. 30
---------------
MORGAN STANLEY INSTITUTIONAL FUND, INC.
(Exact Name of Registrant as Specified in Charter)
1221 Avenue of the Americas, New York, New York 10020
(Address of Principal Executive Office)
Registrant's Telephone Number (800) 548-7786
Harold J. Schaaff, Jr., Esquire
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas, New York, New York 10020
(Name and Address of Agent for Service)
--------------
COPIES TO:
Warren J. Olsen, Esquire Richard W. Grant, Esquire
Morgan Stanley Asset Management Inc. Morgan, Lewis & Bockius LLP
1221 Avenue of the Americas 2000 One Logan Square
New York, NY 10020 Philadelphia, PA 19103
--------------
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE
(CHECK APPROPRIATE BOX)
/X/ IMMEDIATELY UPON FILING PURSUANT TO PARAGRAPH (B)
/ / ON MAY 1, 1996 PURSUANT TO PARAGRAPH (B)
/ / 60 DAYS AFTER FILING PURSUANT TO PARAGRAPH (A)
/ / 75 DAYS AFTER FILING PURSUANT TO PARAGRAPH (A)
/ / ON PURSUANT TO PARAGRAPH (A) OF RULE 485
-------------------------
------------------
Registrant has elected to register an indefinite number of shares pursuant
to Rule 24f-2 under the Investment Company Act of 1940, as amended. Registrant
filed its Rule 24f-2 notice for the period ended December 31, 1995 on February
15, 1996.
- --------------------------------------------------------------------------------
<PAGE>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
CROSS REFERENCE SHEET
PART A - INFORMATION REQUIRED IN A PROSPECTUS
Form N-1A Location in Prospectus for the Fixed Income, Global Fixed Income,
Municipal Bond, Mortgage-Backed
ITEM NUMBER SECURITIES, HIGH YIELD, MONEY MARKET AND MUNICIPAL MONEY MARKET
PORTFOLIOS
Item 1. Cover Page -- Cover Page
Item 2. Synopsis-- Fund Expenses (Estimated for Mortgage-Backed Securities
Portfolio)
Item 3. Condensed Financial Information -- Financial Highlights (for the Fixed
Income, Global Fixed Income, Municipal Bond, High Yield, Money Market
and Municipal Money Market Portfolios only); Performance Information
Item 4. General Description of Registrant -- Prospectus Summary; Investment
Objective and Policies; Additional Investment Information; Investment
Limitations; General Information
Item 5. Management of the Fund -- Prospectus Summary; Management of the Fund;
Portfolio Transactions
Item 5A. Management's Discussion of Fund Performance**
Item 6. Capital Stock and Other Securities -- Purchase of Shares; Redemption
of Shares; Shareholder Services; Valuation of Shares; Dividends and
Capital Gains Distributions; Taxes; General Information
Item 7. Purchase of Securities Being Offered -- Prospectus Summary; Cover
Page; Purchase of Shares; Shareholder Services; Valuation of Shares
Item 8. Redemption or Repurchase -- Prospectus Summary; Redemption of Shares;
Shareholder Services
Item 9. Pending Legal Proceedings -- *
Form N-1A
ITEM NUMBER LOCATION IN PROSPECTUS FOR THE SMALL CAP VALUE EQUITY, VALUE
EQUITY AND BALANCED PORTFOLIOS
Item 1. Cover Page -- Cover Page
Item 2. Synopsis -- Fund Expenses
Item 3. Condensed Financial Information -- Financial Highlights; Performance
Information
Item 4. General Description of Registrant -- Prospectus Summary; Investment
Objective and Policies; Additional Investment Information; Investment
Limitations; General Information
Item 5. Management of the Fund -- Prospectus Summary; Management of the Fund;
Portfolio Transactions
Item 5A. Management's Discussion of Fund Performance**
Item 6. Capital Stock and Other Securities -- Purchase of Shares; Redemption
of Shares; Shareholder Services; Valuation of Shares; Dividends and
Capital Gains Distributions; Taxes; General Information
Item 7. Purchase of Securities Being Offered -- Prospectus Summary; Cover
Page; Purchase of Shares; Shareholder Services; Valuation of Shares
Item 8. Redemption or Repurchase -- Prospectus Summary; Redemption of Shares;
Shareholder Services
Item 9. Pending Legal Proceedings
- -----------------------
* Omitted since the answer is negative or the Item is not applicable.
** Information required by Item 5A is contained in the 1995 Annual Report to
Shareholders, except for the following portfolios which were not in
operation at December 31, 1995: Mortgage-Backed Securities, China Growth,
MicroCap and International Magnum Portfolios. Information required by Item
5A for the aforementioned portfolios will be contained in the next Report
to Shareholders following commencement of operations.
2
<PAGE>
N-1A
ITEM NUMBER LOCATION IN PROSPECTUS FOR THE ACTIVE COUNTRY ALLOCATION
PORTFOLIO
Item 1. Cover Page -- Cover Page
Item 2. Synopsis -- Fund Expenses
Item 3. Condensed Financial Information -- Financial Highlights; Performance
Information
Item 4. General Description of Registrant -- Prospectus Summary; Investment
Objective and Policies; Additional Investment Information; Investment
Limitations; General Information
Item 5. Management of the Fund -- Prospectus Summary; Management of the Fund;
Portfolio Transactions
Item 5A. Management's Discussion of Fund Performance**
Item 6. Capital Stock and Other Securities -- Purchase of Shares; Redemption
of Shares; Shareholder Services; Valuation of Shares; Dividends and
Capital Gains Distributions; Taxes; General Information
Item 7. Purchase of Securities Being Offered -- Prospectus Summary; Cover
Page; Purchase of Shares; Shareholder Services; Valuation of Shares
Item 8. Redemption or Repurchase -- Prospectus Summary; Redemption of Shares;
Shareholder Services
Item 9. Pending Legal Proceedings -- *
Form N-1A
ITEM NUMBER LOCATION IN PROSPECTUS FOR GOLD PORTFOLIO
Item 1. Cover Page -- Cover Page
Item 2. Synopsis -- Fund Expenses
Item 3. Condensed Financial Information -- Financial Highlights; Performance
Information
Item 4. General Description of Registrant -- Prospectus Summary; Investment
Objective and Policies; Additional Investment Information; Investment
Limitations; General Information
Item 5. Management of the Fund -- Prospectus Summary; Management of the Fund;
Portfolio Transactions
Item 5A. Management's Discussion of Fund Performance**
Item 6. Capital Stock and Other Securities -- Purchase of Shares; Redemption
of Shares; Shareholder Services; Valuation of Shares; Dividends and
Capital Gains Distributions; Taxes; General Information
Item 7. Purchase of Securities Being Offered -- Prospectus Summary; Cover
Page; Purchase of Shares; Shareholder Services; Valuation of Shares
Item 8. Redemption or Repurchase -- Prospectus Summary; Redemption of Shares;
Shareholder Services
Item 9. Pending Legal Proceedings--*
- -------------------------
* Omitted since the answer is negative or the Item is not applicable.
** Information required by Item 5A is contained in the 1995 Annual Report to
Shareholders, except for the following portfolios which were not in
operation at December 31, 1995: Mortgage-Backed Securities, China Growth,
MicroCap and International Magnum Portfolios. Information required by Item
5A for the aforementioned portfolios will be contained in the next Report
to Shareholders following commencement of operations.
3
<PAGE>
FORM N-1A LOCATION IN PROSPECTUS FOR THE GLOBAL EQUITY, INTERNATIONAL
EQUITY, INTERNATIONAL SMALL CAP, ASIAN
ITEM NUMBER EQUITY, EUROPEAN EQUITY, JAPANESE EQUITY AND LATIN AMERICAN
PORTFOLIOS
Item 1. Cover Page -- Cover Page
Item 2. Synopsis -- Fund Expenses
Item 3. Condensed Financial Information -- Financial Highlights (for the
Global Equity, International Equity, International Small Cap, Asian
Equity, European Equity, Japanese Equity and Latin American Portfolios
only); Performance Information
Item 4. General Description of Registrant -- Prospectus Summary; Investment
Objective and Policies; Additional Investment Information; Investment
Limitations; General Information
Item 5. Management of the Fund -- Prospectus Summary; Management of the Fund;
Portfolio Transactions
Item 5A. Management's Discussion of Fund Performance**
Item 6. Capital Stock and Other Securities -- Purchase of Shares; Redemption
of Shares; Shareholder Services; Valuation of Shares; Dividends and
Capital Gains Distributions; Taxes; General Information
Item 7. Purchase of Securities Being Offered -- Prospectus Summary; Cover
Page; Purchase of Shares; Shareholder Services; Valuation of Shares
Item 8. Redemption or Repurchase -- Prospectus Summary; Redemption of Shares;
Shareholder Services
Item 9. Pending Legal Proceedings -- *
Form N-1A
ITEM NUMBER LOCATION IN PROSPECTUS FOR THE EMERGING MARKETS AND EMERGING
MARKETS DEBT PORTFOLIOS
Item 1. Cover Page -- Cover Page
Item 2. Synopsis -- Fund Expenses
Item 3. Condensed Financial Information -- Financial Highlights; Performance
Information
Item 4. General Description of Registrant -- Prospectus Summary; Investment
Objective and Policies; Additional Investment Information; Investment
Limitations; General Information
Item 5. Management of the Fund -- Prospectus Summary; Management of the Fund;
Portfolio Transactions
Item 5A. Management's Discussion of Fund Performance**
Item 6. Capital Stock and Other Securities -- Purchase of Shares; Redemption
of Shares; Shareholder Services; Valuation of Shares; Dividends and
Capital Gains Distributions; Taxes; General Information
Item 7. Purchase of Securities Being Offered -- Prospectus Summary; Cover
Page; Purchase of Shares; Shareholder Services; Valuation of Shares
Item 8. Redemption or Repurchase -- Prospectus Summary; Redemption of Shares;
Shareholder Services
Item 9. Pending Legal Proceedings -- *
- ------------------------
* Omitted since the answer is negative or the Item is not applicable.
** Information required by Item 5A is contained in the 1995 Annual Report to
Shareholders, except for the following portfolios which were not in
operation at December 31, 1995: Mortgage-Backed Securities, China Growth,
MicroCap and International Magnum Portfolios. Information required by Item
5A for the aforementioned portfolios will be contained in the next Report
to Shareholders following commencement of operations.
4
<PAGE>
Form N-1A
ITEM NUMBER LOCATION IN PROSPECTUS FOR THE CHINA GROWTH PORTFOLIO
Item 1. Cover Page -- Cover Page
Item 2. Synopsis -- Fund Expenses (Estimated)
Item 3. Condensed Financial Information -- Performance Information
Item 4. General Description of Registrant -- Prospectus Summary; Investment
Objective and Policies; Additional Investment Information; Investment
Limitations; General Information
Item 5. Management of the Fund -- Prospectus Summary; Management of the Fund;
Portfolio Transactions
Item 5A. Management's Discussion of Fund Performance**
Item 6. Capital Stock and Other Securities -- Purchase of Shares; Redemption
of Shares; Shareholder Services; Valuation of Shares; Dividends and
Capital Gains Distributions; Taxes; General Information
Item 7. Purchase of Securities Being Offered -- Prospectus Summary; Cover
Page; Purchase of Shares; Shareholder Services; Valuation of Shares
Item 8. Redemption or Repurchase -- Prospectus Summary; Redemption of Shares;
Shareholder Services
Item 9. Pending Legal Proceedings -- *
Form N-1A
ITEM NUMBER LOCATION IN PROSPECTUS FOR THE EQUITY GROWTH, EMERGING GROWTH,
MICROCAP AND AGGRESSIVE EQUITY PORTFOLIOS
Item 1. Cover Page -- Cover Page
Item 2. Synopsis -- Fund Expenses (Estimated for the MicroCap and Aggressive
Equity Portfolios)
Item 3. Condensed Financial Information -- Financial Highlights (for the
Equity Growth, Emerging Growth and Aggressive Equity Portfolios only);
Performance Information
Item 4. General Description of Registrant -- Prospectus Summary; Investment
Objective and Policies; Additional Investment Information; Investment
Limitations; General Information
Item 5. Management of the Fund -- Prospectus Summary; Management of the Fund;
Portfolio Transactions
Item 5A. Management's Discussion of Fund Performance**
Item 6. Capital Stock and Other Securities -- Purchase of Shares; Redemption
of Shares; Shareholder Services; Valuation of Shares; Dividends and
Capital Gains Distributions; Taxes; General Information
Item 7. Purchase of Securities Being Offered -- Prospectus Summary; Cover
Page; Purchase of Shares; Shareholder Services; Valuation of Shares
Item 8. Redemption or Repurchase -- Prospectus Summary; Redemption of Shares;
Shareholder Services
Item 9. Pending Legal Proceedings -- *
- -------------------------
* Omitted since the answer is negative or the Item is not applicable.
** Information required by Item 5A is contained in the 1995 Annual Report to
Shareholders, except for the following portfolios which were not in
operation at December 31, 1995: Mortgage-Backed Securities, China Growth,
MicroCap and International Magnum Portfolios. Information required by Item
5A for the aforementioned portfolios will be contained in the next Report
to Shareholders following commencement of operations.
5
<PAGE>
Form N-1A
ITEM NUMBER LOCATION IN PROSPECTUS FOR THE U.S. REAL ESTATE PORTFOLIO
Item 1. Cover Page -- Cover Page
Item 2. Synopsis -- Fund Expenses
Item 3. Condensed Financial Information -- Financial Highlights; Performance
Information
Item 4. General Description of Registrant -- Prospectus Summary; Investment
Objective and Policies; Additional Investment Information; Investment
Limitations; General Information
Item 5. Management of the Fund -- Prospectus Summary; Management of the Fund;
Portfolio Transactions
Item 5A. Management's Discussion of Fund Performance**
Item 6. Capital Stock and Other Securities -- Purchase of Shares; Redemption
of Shares; Shareholder Services; Valuation of Shares; Dividends and
Capital Gains Distributions; Taxes; General Information
Item 7. Purchase of Securities Being Offered -- Prospectus Summary; Cover
Page; Purchase of Shares; Shareholder Services; Valuation of Shares
Item 8. Redemption or Repurchase -- Prospectus Summary; Redemption of Shares;
Shareholder Services
Item 9. Pending Legal Proceedings -- *
Form N-1A
ITEM NUMBER LOCATION IN PROSPECTUS FOR THE INTERNATIONAL MAGNUM PORTFOLIO
Item 1. Cover Page -- Cover Page
Item 2. Synopsis -- Fund Expenses (Estimated)
Item 3. Condensed Financial Information -- Performance Information
Item 4. General Description of Registrant -- Prospectus Summary; Investment
Objective and Policies; Additional Investment Information; Investment
Limitations; General Information
Item 5. Management of the Fund -- Prospectus Summary; Management of the Fund;
Portfolio Transactions
Item 5A. Management's Discussion of Fund Performance**
Item 6. Capital Stock and Other Securities -- Purchase of Shares; Redemption
of Shares; Shareholder Services; Valuation of Shares; Dividends and
Capital Gains Distributions; Taxes; General Information
Item 7. Purchase of Securities Being Offered -- Prospectus Summary; Cover
Page; Purchase of Shares; Shareholder Services; Valuation of Shares
Item 8. Redemption or Repurchase -- Prospectus Summary; Redemption of Shares;
Shareholder Services
Item 9. Pending Legal Proceedings -- *
- -------------------------
* Omitted since the answer is negative or the Item is not applicable.
** Information required by Item 5A is contained in the 1995 Annual Report to
Shareholders, except for the following portfolios which were not in
operation at December 31, 1995: Mortgage-Backed Securities, China Growth,
MicroCap and International Magnum Portfolios. Information required by Item
5A for the aforementioned portfolios will be contained in the next Report
to Shareholders following commencement of operations.
6
<PAGE>
PART B - INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
Form N-1A
ITEM NUMBER LOCATION IN STATEMENT OF ADDITIONAL INFORMATION FOR THE FIXED
INCOME, GLOBAL FIXED INCOME, MUNICIPAL BOND, MORTGAGE-BACKED
SECURITIES, HIGH YIELD, MONEY MARKET, MUNICIPAL MONEY MARKET,
SMALL CAP VALUE EQUITY, VALUE EQUITY, BALANCED, ACTIVE COUNTRY
ALLOCATION, GOLD, GLOBAL EQUITY, INTERNATIONAL EQUITY,
INTERNATIONAL MAGNUM, INTERNATIONAL SMALL CAP, ASIAN EQUITY,
EUROPEAN EQUITY, JAPANESE EQUITY, LATIN AMERICAN, EMERGING
MARKETS, EMERGING MARKETS DEBT, CHINA GROWTH, EQUITY GROWTH,
EMERGING GROWTH, MICROCAP, AGGRESSIVE EQUITY AND U.S. REAL ESTATE
PORTFOLIOS.
Item 10. Cover Page -- Cover Page
Item 11. Table of Contents -- Cover Page
Item 12. General Information and History -- *
Item 13. Investment Objective and Policies -- Investment Objectives and
Policies; Investment Limitations
Item 14. Management of the Fund -- Management of the Fund
Item 15. Control Persons and Principal Holders of Securities -- Management of
the Fund; General
Information
Item 16. Investment Advisory and Other Services -- Management of the Fund
Item 17. Brokerage Allocation -- *
Item 18. Capital Stock and Other Securities -- General Information
Item 19. Purchase, Redemption and Pricing of Securities Being Offered --
Purchase of Shares; Redemption of Shares; Net Asset Value; General
Information
Item 20. Tax Status -- Federal Tax Treatment of Forward Currency and Futures
Contracts
Item 21. Underwriters -- *
Item 22. Calculation of Performance Data -- Performance Information
Item 23. Financial Statements -- Financial Statements
PART C OTHER INFORMATION
Part C contains the information required by the terms contained
therein under the items set forth in the form.
- ------------------------
* Omitted since the answer is negative or the Item is not applicable.
7
<PAGE>
The Prospectus for the China Growth Portfolio, included as part of
Post-Effective Amendment No. 25 to the Registration Statement on Form N1-A of
Morgan Stanley Institutional Fund, Inc. (File No. 33-23166) filed with the
Securities and Exchange Commission via EDGAR on August 1, 1995, is hereby
incorporated by reference as if set forth in full herein.
<PAGE>
- --------------------------------------------------------------------------------
P R O S P E C T U S
-----------------------------------------------------------------------------
FIXED INCOME PORTFOLIO
GLOBAL FIXED INCOME PORTFOLIO
MUNICIPAL BOND PORTFOLIO
MORTGAGE-BACKED SECURITIES PORTFOLIO
HIGH YIELD PORTFOLIO
MONEY MARKET PORTFOLIO
MUNICIPAL MONEY MARKET PORTFOLIO
PORTFOLIOS OF THE
MORGAN STANLEY INSTITUTIONAL FUND, INC.
P.O. BOX 2798, BOSTON, MASSACHUSETTS 02208-2798
FOR INFORMATION CALL 1-800-548-7786
----------------
Morgan Stanley Institutional Fund, Inc. (the "Fund") is a no-load, open-end
management investment company or mutual fund, which offers redeemable shares in
a series of diversified and non-diversified investment portfolios
("portfolios"). The Fund currently consists of twenty-eight portfolios
representing a broad range of investment choices. The Fund is designed to
provide clients with attractive alternatives for meeting their investment needs.
This prospectus (the "Prospectus") pertains to the Class A and the Class B
shares of the Fixed Income, Global Fixed Income, Municipal Bond, Mortgage-Backed
Securities and High Yield Portfolios (the "Non-Money Portfolios") and to the
Class A shares of the Money Market and Municipal Money Market Portfolios (the
"Money Portfolios") (collectively, the "Portfolios"). On January 2, 1996, the
Non-Money Portfolios began offering two classes of shares, the Class A shares
and the Class B shares, except for the Money Market, Municipal Money Market and
International Small Cap Portfolios which only offer Class A shares. All shares
of the Portfolios owned prior to January 2, 1996 were redesignated Class A
shares on January 2, 1996. The Class A and Class B shares currently offered by
the Non-Money Portfolios have different minimum investment requirements and fund
expenses. Shares of the portfolios are offered with no sales charge or exchange
or redemption fee (with the exception of the International Small Cap Portfolio).
THE HIGH YIELD PORTFOLIO INVESTS PREDOMINANTLY IN LOWER RATED BONDS,
COMMONLY REFERRED TO AS "JUNK BONDS." BONDS OF THIS TYPE ARE CONSIDERED TO BE
SPECULATIVE WITH REGARD TO THE PAYMENT OF INTEREST AND RETURN OF PRINCIPAL.
INVESTORS SHOULD CAREFULLY ASSESS THE RISKS ASSOCIATED WITH AN INVESTMENT IN
THIS PORTFOLIO. SEE "RISK FACTORS RELATING TO INVESTING IN HIGH YIELD
SECURITIES."
INVESTMENTS IN THE MONEY MARKET AND MUNICIPAL MONEY MARKET PORTFOLIOS ARE
NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT. THERE IS NO ASSURANCE
THAT THE MONEY MARKET AND MUNICIPAL MONEY MARKET PORTFOLIOS WILL BE ABLE TO
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
INVESTORS SHOULD NOTE THAT THE GLOBAL FIXED INCOME PORTFOLIO MAY INVEST UP
TO 10% OF ITS TOTAL ASSETS IN RESTRICTED SECURITIES. INVESTMENTS IN RESTRICTED
SECURITIES IN EXCESS OF 5% OF A PORTFOLIO'S TOTAL ASSETS MAY BE CONSIDERED A
SPECULATIVE ACTIVITY, MAY INVOLVE GREATER RISK AND MAY INCREASE THE PORTFOLIO'S
EXPENSES.
The Fund is designed to meet the investment needs of discerning investors
who place a premium on quality and personal service. With Morgan Stanley Asset
Management Inc. as Adviser and Administrator (the "Adviser" and the
"Administrator") and with Morgan Stanley & Co. Incorporated ("Morgan Stanley")
as Distributor, the Fund makes available to institutional and high net worth
individual investors a series of portfolios which benefit from the investment
expertise and commitment to excellence associated with Morgan Stanley and its
affiliates.
This Prospectus is designed to set forth concisely the information about the
Fund that a prospective investor should know before investing and it should be
retained for future reference. The Fund offers additional portfolios which are
described in other prospectuses and under "Prospectus Summary" below. The Fund
currently offers the following portfolios: (i) GLOBAL AND INTERNATIONAL EQUITY
- -- Active Country Allocation, Asian Equity, Emerging Markets, European Equity,
Global Equity, Gold, International Equity, International Magnum, International
Small Cap, Japanese Equity and Latin American Portfolios; (ii) U.S. EQUITY --
Aggressive Equity, Emerging Growth, Equity Growth, MicroCap, Small Cap Value
Equity, U.S. Real Estate and Value Equity Portfolios; (iii) EQUITY AND FIXED
INCOME -- Balanced Portfolio; (iv) FIXED INCOME -- Emerging Markets Debt, Fixed
Income, Global Fixed Income, High Yield, Mortgage-Backed Securities and
Municipal Bond Portfolios; and (v) MONEY MARKET -- Money Market and Municipal
Money Market Portfolios. Additional information about the Fund is contained in a
"Statement of Additional Information" dated May 1, 1996, which is incorporated
herein by reference. The Statement of Additional Information and the
prospectuses pertaining to the other portfolios of the Fund are available upon
request and without charge by writing or calling the Fund at the address and
telephone number set forth above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1996.
<PAGE>
FUND EXPENSES
The following table illustrates the expenses and fees that a shareholder of
the Portfolios indicated below will incur:
<TABLE>
<CAPTION>
GLOBAL MORTGAGE- MUNICIPAL
FIXED FIXED MUNICIPAL BACKED HIGH MONEY MONEY
INCOME INCOME BOND SECURITIES YIELD MARKET MARKET
SHAREHOLDER TRANSACTION EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- --------------------------------------------------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Maximum Sales Load Imposed on Purchases
Class A.......................................... None None None None None None None
Class B.......................................... None None None None None N/A N/A
Maximum Sales Load Imposed on Reinvested Dividends
Class A.......................................... None None None None None None None
Class B.......................................... None None None None None N/A N/A
Deferred Sales Load
Class A.......................................... None None None None None None None
Class B.......................................... None None None None None N/A N/A
Redemption Fees
Class A.......................................... None None None None None None None
Class B.......................................... None None None None None N/A N/A
Exchange Fees
Class A.......................................... None None None None None None None
Class B.......................................... None None None None None None None
</TABLE>
<TABLE>
<CAPTION>
GLOBAL MORTGAGE- MUNICIPAL
FIXED FIXED MUNICIPAL BACKED HIGH MONEY MONEY
INCOME INCOME BOND SECURITIES YIELD MARKET MARKET
ANNUAL FUND OPERATING EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- -------------------------------------------------- -------- -------- -------- -------- -------- -------- --------
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<S> <C> <C> <C> <C> <C> <C> <C>
Management Fee (Net of Fee Waivers)***
Class A......................................... 0.21% 0.19% 0.07% 0.20% 0.42% 0.30%* 0.30%*
Class B......................................... 0.21% 0.19% 0.07% 0.20% 0.42% N/A N/A
12b-1 Fees
Class A......................................... None None None None None None None
Class B......................................... 0.15%** 0.15%** 0.25% 0.25% 0.25% N/A N/A
Other Expenses
Class A......................................... 0.24% 0.31% 0.38% 0.25% 0.33% 0.21% 0.22%
Class B......................................... 0.24% 0.31% 0.38% 0.25% 0.33% N/A N/A
-------- -------- -------- -------- -------- -------- --------
Total Operating Expenses (Net of Fee Waivers)***
Class A......................................... 0.45% 0.50% 0.45% 0.45% 0.75% 0.51%* 0.52%*
Class B......................................... 0.70% 0.65% 0.70% 0.70% 1.00% N/A N/A
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
</TABLE>
- ------------------------------
*No fee waiver or expense reimbursement is in effect for this Portfolio.
**The Distributor has agreed to waive 0.10% of the 0.25% distribution fee it is
entitled to receive from this Portfolio.
***The Adviser has agreed to waive its management fees and/or reimburse each
Portfolio, if necessary, if such fees would cause any of the total annual
operating expenses of the Portfolios to exceed a specified percentage of
their respective average daily net assets. Set forth below, for each
Portfolio as applicable, are the management fees and total operating expenses
absent such fee waivers and/or expense reimbursements as a percent of average
daily net assets of the Class A shares of the Portfolios and Class B shares
of the Non-Money Portfolios, respectively.
2
<PAGE>
<TABLE>
<CAPTION>
TOTAL OPERATING EXPENSES
ABSENT FEE WAIVERS
MANAGEMENT FEES ----------------------------
PORTFOLIO ABSENT FEE WAIVERS CLASS A CLASS B+
- -------------------------------------------------------------- ----------------------- ------------- -------------
<S> <C> <C> <C>
Fixed Income.................................................. 0.35% 0.59% 0.74%
Global Fixed Income........................................... 0.40% 0.71% 0.86%
Municipal Bond................................................ 0.35% 0.73% 0.98%
Mortgage-Backed Securities.................................... 0.35% 0.60%+ 0.85%
High Yield.................................................... 0.50% 0.83% 1.08%
Money Market.................................................. 0.30% 0.51%++ N/A
Municipal Money Market........................................ 0.30% 0.52%++ N/A
</TABLE>
- ------------------------
+ Estimated.
++ No fee waiver or expense reimbursement is in effect for this Portfolio.
These reductions became or will become effective as of the inception of each
Portfolio. As a result of these reductions, the Investment Advisory Fees stated
above are lower than the contractual fees stated under "Management of the Fund."
For further information on Fund expenses see "Management of the Fund."
The purpose of the table above is to assist the investor in understanding
the various expenses that an investor in the Fund will bear directly or
indirectly. The Class A fees and expenses for the Portfolios are based on actual
figures for the fiscal year ended December 31, 1995. The Class A fees and
expenses for the Mortgage-Backed Securities Portfolio are based on estimates and
assume that the average daily net assets of the Class A shares of the
Mortgage-Backed Securities Portfolio will be $50,000,000. The Class B fees and
expenses of each Non-Money Portfolio are based on estimates, assuming that the
average daily net assets of the Class B shares of each Non-Money Portfolio will
be $50,000,000. "Other Expenses" include Board of Directors' fees and expenses,
amortization of organizational costs, professional fees, filing fees, and costs
for shareholders reports. Due to the continuous nature of Rule 12b-1 fees, long
term Class B shareholders may pay more than the equivalent of the maximum
front-end sales charges otherwise permitted by the Rules of Fair Practice of the
National Association of Securities Dealers, Inc. ("NASD").
3
<PAGE>
The following example illustrates the expenses that you would pay on a
$1,000 investment assuming (1) a 5% annual rate of return and (2) redemption at
the end of each time period. As noted in the table above, the Portfolios charge
no redemption fees of any kind. The following example is based on total
operating expenses of the Portfolios after fee waivers.
<TABLE>
<CAPTION>
1 3 5 10
YEAR YEARS YEARS YEARS
----- ----- ----- -----
<S> <C> <C> <C> <C>
Fixed Income Portfolio
Class A............................. $ 5 $ 14 $ 25 $ 57
Class B............................. $ 6 $ 19 $ 33 $ 75
Global Fixed Income
Class A............................. $ 5 $ 16 $ 28 $ 63
Class B............................. $ 7 $ 21 $ 36 $ 81
Municipal Bond Portfolio
Class A............................. $ 5 $ 14 25 57
Class B............................. $ 7 $ 22 39 87
Mortgage-Backed Securities Portfolio
Class A............................. $ 5 $ 14 * *
Class B............................. $ 7 $ 22 * *
High Yield Portfolio
Class A............................. $ 8 $ 24 $ 42 $ 93
Class B............................. $ 10 $ 32 $ 55 $122
Money Market Portfolio
Class A............................. $ 5 $ 16 $ 29 $ 64
Municipal Money Market Portfolio
Class A............................. $ 5 $ 17 $ 29 $ 65
</TABLE>
- ------------------------
* Because the Mortgage-Backed Securities Portfolio was not operational as of the
Fund's fiscal year end, the Fund has not projected expenses beyond the
three-year period shown.
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
The Fund intends to continue to comply with all state laws that restrict
investment company expenses. Currently, the most restrictive state law requires
that the aggregate annual expenses of an investment company shall not exceed two
and one-half percent (2 1/2%) of the first $30 million of average net assets,
two percent (2%) of the next $70 million of average net assets, and one and
one-half percent (1 1/2%) of the remaining net assets of such investment
company.
The Adviser has agreed to a reduction in the amounts payable to it, and to
reimburse any Portfolio, if necessary, if in any fiscal year the sum of the
Portfolio's expenses exceed the limit set by applicable state law.
4
<PAGE>
FINANCIAL HIGHLIGHTS
The following tables provides financial highlights for the Class A shares of
the Fixed Income, Global Fixed Income, Municipal Bond, High Yield, Money Market
and Municipal Money Market Portfolios for each of the periods presented. The
audited financial highlights for the Class A shares for the fiscal year ended
December 31, 1995 are part of the Fund's financial statements which appear in
the Fund's December 31, 1995 Annual Report to Shareholders and which are
included in the Fund's Statement of Additional Information. The Portfolios'
financial highlights for each of the periods in the five years ended December
31, 1995 have been audited by Price Waterhouse LLP, whose unqualified report
thereon is also included in the Statement of Additional Information. Additional
performance information for the Class A shares of the Fixed Income, Global Fixed
Income, Municipal Bond, High Yield, Money Market and Municipal Money Market
Portfolios is included in the Annual Report. The Annual Report and the financial
statements therein, along with the Statement of Additional Information, are
available at no cost from the Fund at the address and telephone number noted on
the cover page of this Prospectus. Financial highlights are not available for
the new Class B shares since they were not offered as of December 31, 1995. The
Mortgage-Backed Securities Portfolio was not operational as of December 31,
1995. Subsequent to October 31, 1992 (the Fund's prior fiscal year end), the
Fund changed its fiscal year end to December 31. The following information
should be read in conjunction with the financial statements and notes thereto.
5
<PAGE>
FIXED INCOME PORTFOLIO
<TABLE>
<CAPTION>
MAY 15, TWO MONTHS
1991* TO YEAR ENDED ENDED YEAR ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1991 1992 1992 1993 1994 1995
----------- ----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD..... $ 10.00 $ 10.55 $ 10.92 $ 10.93 $ 11.05 $ 9.82
----------- ----------- ------------ ------------ ------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment
Income (1)............ 0.22 0.69 0.10 0.54 0.59 0.72
Net Realized and
Unrealized Gain/(Loss)
on Investments........ 0.49 0.39 0.01 0.41 (0.92) 1.06
----------- ----------- ------------ ------------ ------------ ------------
Total from Investment
Operations............ 0.71 1.08 0.11 0.95 (0.33) 1.78
----------- ----------- ------------ ------------ ------------ ------------
DISTRIBUTIONS
Net Investment
Income................ (0.16) (0.69) (0.10) (0.56) (0.53) (0.79)
In Excess of Net
Investment Income..... -- -- -- (0.01) -- --
Net Realized Gain...... -- (0.02) -- (0.26) (0.37) --
In Excess of Net
Realized Gain......... -- -- -- -- (0.00)+ --
----------- ----------- ------------ ------------ ------------ ------------
Total Distributions.... (0.16) (0.71) (0.10) (0.83) (0.90) (0.79)
----------- ----------- ------------ ------------ ------------ ------------
NET ASSET VALUE, END OF
PERIOD.................. $ 10.55 $ 10.92 $ 10.93 $ 11.05 $ 9.82 $ 10.81
----------- ----------- ------------ ------------ ------------ ------------
----------- ----------- ------------ ------------ ------------ ------------
TOTAL RETURN............. 7.12% 10.61% 1.02% 9.07% (3.10)% 18.76%
----------- ----------- ------------ ------------ ------------ ------------
----------- ----------- ------------ ------------ ------------ ------------
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of Period
(Thousands)............. $ 72,326 $ 146,546 $ 154,210 $ 240,668 $ 209,331 $ 162,527
Ratio of Expenses to
Average Net
Assets (1)(2)........... 0.45%** 0.45% 0.45%** 0.45% 0.45% 0.45%
Ratio of Net Investment
Income to Average Net
Assets (1)(2)........... 7.29%** 6.59% 5.56%** 4.97% 5.73% 6.85%
Portfolio Turnover
Rate.................... 48% 105% 15% 240% 388% 172%
</TABLE>
- --------------------------
(1) Effect of voluntary expense limitation during the period:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Per share benefit to
net investment
income................ $ 0.01 $ 0.02 $ 0.01 $ 0.02 $ 0.01 $ 0.01
Ratios before expense
limitation:
Expenses to Average Net
Assets................ 0.81%** 0.59% 0.75%** 0.60% 0.58% 0.59%
Net Investment Income
to Average Net
Assets................ 6.93%** 6.45% 5.26%** 4.82% 5.60% 6.71%
</TABLE>
(2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled
to receive a management fee calculated at an annual rate of 0.35% of the
average daily net assets of the Fixed Income Portfolio. The Adviser has
agreed to waive a portion of this fee and/or reimburse expenses of the
Portfolio to the extent that the total operating expenses of the Portfolio
exceed 0.45% of the average daily net assets of the Class A shares and 0.70%
of the average daily net assets of the Class B shares. In the period ended
October 31, 1991, the year ended October 31, 1992, the two month period
ended December 31, 1992, the years ended December 31, 1993, 1994 and 1995,
the Adviser waived management fees and/or reimbursed expenses totalling
$69,000, $165,000, $74,000, $307,000, $276,000, $142,000 and $247,000,
respectively, for the Fixed Income Portfolio.
* Commencement of Operations.
** Annualized.
+ Amount is less than $0.01 per share.
6
<PAGE>
GLOBAL FIXED INCOME PORTFOLIO
<TABLE>
<CAPTION>
MAY 1, TWO MONTHS
1991* TO YEAR ENDED ENDED YEAR ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1991 1992 1992 1993 1994 1995
----------- ----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD..... $ 10.00 $ 10.61 $ 11.41 $ 11.26 $ 11.68 $ 10.29
----------- ----------- ------------ ------------ ------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment
Income (1)............ 0.16 0.53 0.14 0.69 0.70 0.76
Net Realized and
Unrealized Gain (Loss)
on Investments........ 0.45 0.55 (0.29) 0.90 (1.38) 1.15
----------- ----------- ------------ ------------ ------------ ------------
Total from Investment
Operations............ 0.61 1.08 (0.15) 1.59 (0.68) 1.91
----------- ----------- ------------ ------------ ------------ ------------
DISTRIBUTIONS
Net Investment
Income................ -- (0.27) -- (0.79) (0.40) (0.98)
In Excess of Net
Investment Income..... -- -- -- (0.22) -- --
Net Realized Gain...... -- (0.01) -- (0.16) (0.31) --
----------- ----------- ------------ ------------ ------------ ------------
Total Distributions.... -- (0.28) -- (1.17) (0.71) (0.98)
----------- ----------- ------------ ------------ ------------ ------------
NET ASSET VALUE, END OF
PERIOD.................. $ 10.61 $ 11.41 $ 11.26 $ 11.68 $ 10.29 $ 11.22
----------- ----------- ------------ ------------ ------------ ------------
----------- ----------- ------------ ------------ ------------ ------------
TOTAL RETURN............. 6.10% 10.29% (1.31)% 15.34% (6.08)% 19.32%
----------- ----------- ------------ ------------ ------------ ------------
----------- ----------- ------------ ------------ ------------ ------------
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of Period
(Thousands)............. $ 28,236 $ 94,847 $ 92,897 $ 172,468 $ 130,675 $ 102,852
Ratio of Expenses to
Average Net
Assets (1)(2)........... 0.50%** 0.50% 0.50%** 0.50% 0.50% 0.50%
Ratio of Net Investment
Income to Average Net
Assets (1)(2)........... 7.24%** 6.92% 6.99%** 5.99% 6.34% 6.79%
Portfolio Turnover
Rate.................... 20% 144% 9% 108% 171% 207%
</TABLE>
- --------------------------
(1) Effect of voluntary expense limitation during the period:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Per share benefit to
net investment
income................ $ 0.02 $ 0.03 $ 0.01 $ 0.02 $ 0.02 $ 0.02
Ratios before expense
limitation:
Expenses to Average Net
Assets................ 1.62%** 0.86% 0.90%** 0.70% 0.66% 0.71%
Net Investment Income
to Average Net
Assets................ 6.12%** 6.56% 6.59%** 5.79% 6.18% 6.58%
</TABLE>
(2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled
to receive a management fee calculated at an annual rate of 0.40% of the
average daily net assets of the Global Fixed Income Portfolio. The Adviser
has agreed to waive a portion of this fee and/or reimburse expenses of the
Portfolio to the extent that the total operating expenses of the Portfolio
exceed 0.50% of the average daily net assets of the Class A shares and 0.75%
of the average daily net assets of the Class B shares. In the fiscal period
ended October 31, 1991, the year ended October 31, 1992, the two months
ended December 31, 1992, the years ended December 31, 1993, 1994 and 1995,
the Adviser waived management fees and/or reimbursed expenses totalling
$67,000, $201,000, $64,000, $260,000, $238,000 and $204,000, respectively,
for the Global Fixed Income Portfolio.
* Commencement of Operations.
** Annualized.
7
<PAGE>
MUNICIPAL BOND PORTFOLIO
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 18,
1995* TO
DECEMBER 31,
1995
------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD............................. $ 10.00
------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income.......................................... 0.44
Net Realized and Unrealized Gain on Investments................ 0.42
------------
Total from Investment Operations............................... 0.86
------------
DISTRIBUTIONS
Net Investment Income.......................................... (0.45)
In Excess of Net Investment Income............................. (0.00)+
Net Realized Gain.............................................. (0.04)
------------
Total Distributions............................................ (0.49)
------------
NET ASSET VALUE, END OF PERIOD................................... $ 10.37
------------
------------
TOTAL RETURN..................................................... 8.80%
------------
------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)............................ $ 45,869
Ratio of Expenses to Average Net Assets (1)(2)................... 0.45%**
Ratio of Net Investment Income to Average Net Assets (1)(2)...... 4.61%**
Portfolio Turnover Rate.......................................... 180%
</TABLE>
- ------------------------
(1) Effect of voluntary expense limitation during the period:
<TABLE>
<S> <C>
Per share benefit to net investment income..................... $ 0.03
Ratios before expense limitation:
Expenses to Average Net Assets................................. 0.73%**
Net Investment Income to Average Net Assets.................... 4.33%**
</TABLE>
(2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled
to receive a management fee calculated at an annual rate of 0.35% of the
average daily net assets of the Municipal Bond Portfolio. The Adviser has
agreed to waive a portion of this fee and/or reimburse expenses of the
Portfolio to the extent that the total operating expenses of the Portfolio
exceed 0.45% of the average daily net assets of the Class A shares and 0.70%
of the average daily net assets of the Class B shares. In the period ended
December 31, 1995, the Adviser waived management and/or reimbursed expenses
totalling $119,000 for the Municipal Bond Portfolio.
* Commencement of Operations.
** Annualized.
+ Amount is less than $0.01 per share.
8
<PAGE>
HIGH YIELD PORTFOLIO
<TABLE>
<CAPTION>
SEPTEMBER TWO MONTHS
28, 1992* ENDED YEAR ENDED YEAR ENDED YEAR ENDED
TO OCTOBER DECEMBER DECEMBER DECEMBER DECEMBER
31, 1992 31, 1992 31, 1993 31, 1994 31, 1995
---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.... $ 10.00 $ 9.77 $ 9.95 $ 11.16 $ 9.55
---------- ----------- ----------- ----------- -----------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1)............. 0.08 0.14 0.90 0.97 1.14
Net Realized and Unrealized
Gain/(Loss) on Investments........... (0.31) 0.19 1.21 (1.40) 0.97
---------- ----------- ----------- ----------- -----------
Total from Investment Operations...... (0.23) 0.33 2.11 (0.43) 2.11
---------- ----------- ----------- ----------- -----------
DISTRIBUTIONS
Net Investment Income................. -- (0.15) (0.90) (0.97) (1.20)
Net Realized Gain..................... -- -- -- (0.21) --
---------- ----------- ----------- ----------- -----------
Total Distributions................... -- (0.15) (0.90) (1.18) (1.20)
---------- ----------- ----------- ----------- -----------
NET ASSET VALUE, END OF PERIOD $ 9.77 $ 9.95 $ 11.16 $ 9.55 $ 10.46
---------- ----------- ----------- ----------- -----------
---------- ----------- ----------- ----------- -----------
TOTAL RETURN (2.30)% 3.41% 22.11% (4.18)% 23.35%
---------- ----------- ----------- ----------- -----------
---------- ----------- ----------- ----------- -----------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)... $16,950 $ 20,194 $ 74,500 $ 97,223 $ 62,245
Ratio of Expenses to Average Net Assets
(1)(2)................................. 0.75%** 0.75%** 0.75% 0.75% 0.75%
Ratio of Net Investment Income to
Average Net Assets (1)(2).............. 9.89%** 8.96%** 8.70% 9.42% 11.09%
Portfolio Turnover Rate................. 9% 24% 104% 74% 90%
</TABLE>
- --------------------------
(1) Effect of voluntary expense limitation during the period:
<TABLE>
<S> <C> <C> <C> <C> <C>
Per share benefit to net investment
income............................... $ 0.01 $ 0.01 $ 0.02 $ 0.001 $ 0.01
Ratios before expense limitation:
Expenses to Average Net Assets........ 1.23%** 1.62%** 0.96% 0.76% 0.83%
Net Investment Income to Average Net
Assets............................... 9.41%** 8.09%** 8.49% 9.41% 11.01%
</TABLE>
(2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled
to receive a management fee calculated at an annual rate of 0.50% of the
average daily net assets of the High Yield Portfolio. The Adviser has agreed
to waive a portion of this fee and/or reimburse expenses of the Portfolio to
the extent that the total operating expenses of the Portfolio exceed 0.75%
of the average daily net assets of the Class A shares and 1.00% of the
average daily net assets of the Class B shares. In the period ended October
31, 1992, the two months ended December 31, 1992, and the years ended
December 31, 1993, 1994 and 1995, the Adviser waived management fees and/or
reimbursed expenses totalling $22,000, $27,000, $82,000, $7,000 and $55,000,
respectively, for the High Yield Portfolio.
* Commencement of Operations.
** Annualized.
9
<PAGE>
MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
NOVEMBER TWO MONTHS
15, 1988* YEAR ENDED YEAR ENDED YEAR ENDED ENDED YEAR ENDED YEAR ENDED YEAR ENDED
TO OCTOBER OCTOBER OCTOBER OCTOBER DECEMBER DECEMBER DECEMBER DECEMBER
31, 1989 31, 1990 31, 1991 31, 1992 31, 1992 31, 1993 31, 1994 31, 1995
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF
PERIOD............... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment
Income (1)......... 0.085 0.079 0.062 0.039 0.005 0.027 0.040 0.054
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
DISTRIBUTIONS
Net Investment
Income............. (0.085) (0.079) (0.062) (0.039) (0.005) (0.027) (0.040) (0.054)
In Excess of Net
Investment
Income............. -- -- -- -- -- 0.000+ -- --
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
Total
Distributions...... (0.085) (0.079) (0.062) (0.039) (0.005) (0.027) (0.040) (0.054)
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
NET ASSET VALUE, END
OF PERIOD............ $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
TOTAL RETURN.......... 8.81% 8.16% 6.37% 3.77% 0.50% 2.76% 3.84% 5.51%
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
RATIOS AND
SUPPLEMENTAL DATA:
Net Assets, End of
Period (Thousands)... $158,582 $516,182 $607,087 $612,968 $599,172 $657,163 $690,503 $836,693
Ratio of Expenses to
Average Net Assets
(1)(2)............... 0.55%** 0.55% 0.53% 0.52% 0.55%** 0.53% 0.49% 0.51%
Ratio of Net
Investment Income to
Average Net Assets
(1)(2)............... 8.80%** 7.87% 6.11% 3.74% 3.11%** 2.71% 3.77% 5.37%
Portfolio Turnover
Rate................. N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
- ------------------------------
(1) Effect of voluntary expense limitation during the period:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Per share benefit to
net investment
income............. $ 0.001 $ 0.000 N/A N/A $ 0.000+ $ 0.000 N/A N/A
Ratios before expense
limitation:
Expenses to Average
Net Assets......... 0.64%** 0.58% N/A N/A 0.59%** 0.54% N/A N/A
Net Investment
Income to Average
Net Assets......... 8.71%** 7.85% N/A N/A 3.07%** 2.70% N/A N/A
</TABLE>
(2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled
to receive a management fee calculated at an annual rate of 0.30% of the
average daily net assets of the Money Market Portfolio. The Adviser has
agreed to waive a portion of this fee and/or reimburse expenses of the
Portfolio to the extent that the total operating expenses of the Portfolio
exceed 0.55% of the average daily net assets of the Class A shares. The
Adviser did not waive fees or reimburse expenses for the years ended October
31, 1991, October 31, 1992, December 31, 1994 and December 31, 1995. In the
period ended October 31, 1989, the year ended October 31, 1990, the two
months ended December 31, 1992 and the year ended December 31, 1993, the
Adviser waived management fees and /or reimbursed expenses totalling
approximately $110,000, $75,000, $37,000 and $18,000, respectively, for the
Money Market Portfolio.
* Commencement of Operations.
** Annualized.
+ Amount if less than $0.001 per share.
10
<PAGE>
MUNICIPAL MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
FEBRUARY TWO MONTHS
10, 1989* YEAR ENDED YEAR ENDED YEAR ENDED ENDED YEAR ENDED YEAR ENDED YEAR ENDED
TO OCTOBER OCTOBER OCTOBER OCTOBER DECEMBER DECEMBER DECEMBER DECEMBER
31, 1989 31, 1990 31, 1991 31, 1992 31, 1992 31, 1993 31, 1994 31, 1995
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF
PERIOD............... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment
Income (1)......... 0.046 0.054 0.043 0.026 0.004 0.019 0.020 0.034
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
DISTRIBUTIONS
Net Investment
Income............. (0.046) (0.054) (0.043) (0.026) (0.004) (0.019) (0.020) (0.034)
In Excess of Net
Investment
Income............. -- -- -- -- -- (0.000)+ -- --
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
Total
Distributions...... (0.046) (0.054) (0.043) (0.026) (0.004) (0.019) (0.020) (0.034)
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
NET ASSET VALUE, END
OF PERIOD............ $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
TOTAL RETURN.......... 4.6% 5.51% 4.35% 2.74% 0.37% 1.91% 2.44% 3.44%
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
RATIOS AND
SUPPLEMENTAL DATA:
Net Assets, End of
Period
(Thousands)........ $ 38,540 $102,195 $166,953 $206,691 $208,866 $266,524 $359,444 $451,519
Ratio of Expenses to
Average Net Assets
(1)(2)............... 0.32%** 0.51% 0.56% 0.55% 0.57%** 0.54% 0.51% 0.52%
Ratio of Net
Investment Income to
Average Net Assets
(1)(2)............... 6.05%** 5.38% 4.18% 2.66% 2.31%** 1.89% 2.42% 3.38%
Portfolio Turnover
Rate................. N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
- ------------------------------
(1) Effect of voluntary expense limitation during the period:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Per share benefit to
net investment
income............. $ 0.002 $ 0.001 N/A N/A $ 0.000+ $ 0.000+ N/A N/A
Ratios before expense
limitation:
Expenses to Average
Net Assets......... 0.74%** 0.63% N/A N/A 0.67%** 0.56% N/A N/A
Net Investment
Income to Average
Net Assets......... 5.63%** 5.26% N/A N/A 2.21%** 1.87% N/A N/A
</TABLE>
(2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled
to receive a management fee calculated at an annual rate of 0.30% of the
average daily net assets of the Municipal Money Market Portfolio. The
Adviser has agreed to waive a portion of this fee and/or reimburse expenses
of the Portfolio to the extent that the total operating expenses of the
Portfolio exceed 0.57% of the average daily net assets of the Class A
shares. The Adviser did not waive fees or reimburse expenses for the years
ended October 31, 1991, October 31, 1992, December 31, 1994 and December 31,
1995. In the period ended October 31, 1989, the year ended October 31, 1990,
the two months ended December 31, 1992 and the year ended December 31, 1993,
the Adviser waived management fees and/or reimbursed expenses totalling
approximately $75,000, $92,000, $36,000 and $46,000, respectively, for the
Municipal Money Market Portfolio.
* Commencement of Operations.
** Annualized.
+ Amount is less than $0.001 per share.
11
<PAGE>
PROSPECTUS SUMMARY
THE FUND
The Fund consists of twenty-eight portfolios, offering institutional and
high net worth individual investors a broad range of investment choices coupled
with the advantages of a no-load mutual fund with Morgan Stanley and its
affiliates providing customized services as Adviser, Administrator and
Distributor. Each portfolio offers Class A shares and, except the International
Small Cap, Money Market and Municipal Money Market Portfolios, also offers Class
B shares. Each portfolio has its own investment objective and policies designed
to meet its specific goals. The investment objective of each Portfolio described
in this Prospectus is as follows:
- The FIXED INCOME PORTFOLIO seeks to produce a high total return consistent
with the preservation of capital by investing in a diversified portfolio
of fixed income securities.
- The GLOBAL FIXED INCOME PORTFOLIO seeks to produce an attractive real rate
of return while preserving capital by investing in fixed income securities
of issuers throughout the world, including U.S. issuers.
- The MUNICIPAL BOND PORTFOLIO seeks to produce a high level of current
income consistent with preservation of principal through investment
primarily in municipal obligations, the interest on which is exempt from
federal income tax.
- The MORTGAGE-BACKED SECURITIES PORTFOLIO seeks to produce as high a level
of current income as is consistent with the preservation of capital by
investing primarily in a variety of investment-grade mortgage-backed
securities.
- The HIGH YIELD PORTFOLIO seeks to maximize total return by investing in a
diversified portfolio of high yield fixed income securities that offer a
yield above that generally available on debt securities in the three
highest rating categories of the recognized rating services.
- The MONEY MARKET PORTFOLIO seeks to maximize current income and preserve
capital while maintaining high levels of liquidity through investing in
high quality money market instruments with remaining maturities of one
year or less.
- The MUNICIPAL MONEY MARKET PORTFOLIO seeks to maximize current tax-exempt
income and preserve capital while maintaining high levels of liquidity
through investing in high quality money market instruments with remaining
maturities of one year or less which are exempt from federal income tax.
The other portfolios of the Fund are described in other prospectuses which
may be obtained from the Fund at the address and telephone number noted on the
cover page of this Prospectus. The objectives of these other portfolios are
listed below:
GLOBAL AND INTERNATIONAL EQUITY:
- The ACTIVE COUNTRY ALLOCATION PORTFOLIO seeks long-term capital
appreciation by investing in accordance with country weightings determined
by the Adviser in equity securities of non-U.S. issuers which, in the
aggregate, replicate broad country indices.
- The ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Asian issuers.
- The CHINA GROWTH PORTFOLIO seeks to provide long-term capital appreciation
by investing primarily in the equity securities of issuers in The People's
Republic of China, Hong Kong and Taiwan.
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- The EMERGING MARKETS PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of emerging country issuers.
- The EUROPEAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of European issuers.
- The GLOBAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of issuers throughout the world,
including U.S. issuers.
- The GOLD PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of foreign and domestic issuers engaged in
gold-related activities.
- The INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers.
- The INTERNATIONAL MAGNUM PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers in accordance
with EAFE country (as defined in "Investment Objectives and Policies"
below) weightings determined by the Adviser.
- The INTERNATIONAL SMALL CAP PORTFOLIO seeks long-term capital appreciation
by investing primarily in equity securities of non-U.S. issuers with
equity market capitalizations of less than $1 billion.
- The JAPANESE EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Japanese issuers.
- The LATIN AMERICAN PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Latin American issuers and
debt securities issued or guaranteed by Latin American governments or
governmental entities.
U.S. EQUITY:
- The AGGRESSIVE EQUITY PORTFOLIO seeks capital appreciation by investing
primarily in corporate equity and equity-linked securities.
- The EMERGING GROWTH PORTFOLIO seeks long-term capital appreciation by
investing primarily in growth-oriented equity securities of small- to
medium-sized corporations.
- The EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation by
investing primarily in growth-oriented equity securities of medium and
large capitalization companies.
- The MICROCAP PORTFOLIO seeks long-term capital appreciation by investing
primarily in growth-oriented equity securities of small corporations.
- The SMALL CAP VALUE EQUITY PORTFOLIO seeks high long-term total return by
investing in undervalued equity securities of small- to medium-sized
companies.
- The U.S. REAL ESTATE PORTFOLIO seeks to provide above average current
income and long-term capital appreciation by investing primarily in equity
securities of companies in the U.S. real estate industry, including real
estate investment trusts.
- The VALUE EQUITY PORTFOLIO seeks high total return by investing in equity
securities which the Adviser believes to be undervalued relative to the
stock market in general at the time of purchase.
EQUITY AND FIXED INCOME:
- The BALANCED PORTFOLIO seeks high total return while preserving capital by
investing in a combination of undervalued equity securities and fixed
income securities.
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FIXED INCOME:
- The EMERGING MARKETS DEBT PORTFOLIO seeks high current income, and
secondarily, capital appreciation, by investing primarily in debt
securities of government, government-related and corporate issuers located
in emerging countries.
INVESTMENT MANAGEMENT
Morgan Stanley Asset Management Inc., a wholly owned subsidiary of Morgan
Stanley Group Inc., which, together with its affiliated asset management
companies, at December 31, 1995 had approximately $57.4 billion in assets under
management as an investment manager or as a fiduciary adviser, acts as
investment adviser to the Fund and each of its portfolios. See "Management of
the Fund -- Investment Adviser" and "Management of the Fund -- Administrator."
HOW TO INVEST
Class A shares of each Portfolio are offered directly to investors at net
asset value with no sales commission or 12b-1 charges. Class B shares, offered
only by the Non-Money Portfolios, are offered at net asset value with no sales
commission, but with a 12b-1 fee, which is accrued daily and paid quarterly,
equal to 0.25% of the Class B shares' average daily net assets on an annualized
basis. While each Money Portfolio expects to maintain a net asset value per
share of $1.00, there can be no assurance that either Money Portfolio can
maintain such net asset value per share. Share purchases may be made by sending
investments directly to the Fund or through the Distributor. Shares in a
Portfolio account opened prior to January 2, 1996 were designated Class A shares
on January 2, 1996. For a Non-Money Portfolio account opened on or after January
2, 1996 (a "New Non-Money Account"), the minimum initial investment is $500,000
for Class A shares and $100,000 for Class B shares. The minimum initial
investment for each Money Portfolio is $50,000. Certain exceptions to the
foregoing minimums apply to (1) shares in a Non-Money Portfolio account opened
prior to January 2, 1996 (each, a "Pre-1996 Non-Money Account") with a value of
$100,000 or more on March 1, 1996 (a "Grandfathered Class A Account"); (2)
Portfolio accounts held by officers of the Adviser and its affiliates; and (3)
certain advisory or asset allocation accounts, such as Total Funds Management
accounts, managed by Morgan Stanley or its affiliates, including the Adviser
("Managed Accounts"). The Adviser reserves the right in its sole discretion to
determine which of such advisory or asset allocation accounts shall be Managed
Accounts. For information regarding Managed Accounts please contact your Morgan
Stanley account representative or the Fund at the telephone number provided on
the cover of this Prospectus. Shares in a Pre-1996 Non-Money Account with a
value of less than $100,000 on March 1, 1996 (a "Grandfathered Class B Account")
converted to Class B shares on March 1, 1996. The minimum investment levels may
be waived at the discretion of the Adviser for (i) certain employees and
customers of Morgan Stanley or its affiliates and certain trust departments,
brokers, dealers, agents, financial planners, financial services firms, or
investment advisers that have entered into an agreement with Morgan Stanley or
its affiliates; and (ii) retirement and deferred compensation plans and trusts
used to fund such plans, including, but not limited to, those defined in Section
401(a), 403(b) or 457 of the Internal Revenue Code of 1986, as amended, and
"rabbi trusts". See "Purchase of Shares -- Minimum Investment and Account Sizes;
Conversion from Class A to Class B Shares."
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The minimum subsequent investment for each Portfolio account is $1,000
(except for automatic reinvestment of dividends and capital gains distributions
for which there is no minimum). Such subsequent investments will be applied to
purchase additional shares in the same class held by a shareholder in a
Portfolio account. See "Purchase of Shares -- Additional Investments."
HOW TO REDEEM
Class A shares or Class B shares of the Portfolios may be redeemed at any
time, without cost, at the net asset value per share of shares of the applicable
class next determined after receipt of the redemption request. The redemption
price may be more or less than the purchase price. Certain redemptions may cause
involuntary redemption or automatic conversion. Class A or Class B shares held
in New Non-Money Accounts are subject to involuntary redemption if shareholder
redemption(s) of such shares reduces the value of such account to less than
$100,000 for a continuous 60-day period. Involuntary redemption does not apply
to Managed Accounts, Grandfathered Class A Accounts and Grandfathered Class B
Accounts, regardless of the value of such accounts. Class A shares in a New
Non-Money Account will convert to Class B shares if shareholder redemption(s) of
such shares reduces the value of such account to less than $500,000 for a
continuous 60-day period. Class B shares in a New Non-Money Account will convert
to Class A shares if shareholder purchases of additional Class B shares or
market activity cause the value of the Class B shares in the New Non-Money
Account to increase to $500,000 or more. If a shareholder reduces its total
investment in Class A shares of a Money Portfolio to less than $10,000, the
investment may be subject to redemption. See "Purchase of Shares -- Minimum
Account Sizes and Involuntary Redemption of Shares" and "Redemption of Shares."
RISK FACTORS
The investment policies of each of the Portfolios entail certain risks and
considerations of which an investor should be aware. The Fixed Income, Global
Fixed Income, High Yield and Money Market Portfolios may invest in securities of
foreign issuers, which are subject to certain risks not typically associated
with U.S. securities. In addition, the High Yield Portfolio may invest in lower
rated and unrated securities which are subject to risk factors. In particular:
(1) adverse economic and corporate changes and changes in interest rates may
have a greater impact on issuers of such securities and may lead to greater
price volatility, and (2) such securities may be more difficult to value
accurately or sell in the secondary market. See "Investment Objectives and
Policies" and "Additional Investment Information." In addition, each Portfolio
may invest in repurchase agreements, lend its portfolio securities and purchase
securities on a when-issued or delayed delivery basis. The Money Market
Portfolio may invest in reverse repurchase agreements. Each Portfolio, except
the Global Fixed Income Portfolio, may invest in futures contracts and options
on futures contracts. The Fixed Income, Global Fixed Income and High Yield
Portfolios may invest in forward foreign currency exchange contracts to hedge
currency risks associated with investment in non-U.S. dollar denominated
securities. The Municipal Money Market Portfolio may invest in "puts" on
municipal bonds or notes and the Municipal Bond and Municipal Money Market
Portfolios may invest up to 20% of such Portfolios' total assets in taxable
securities. Each of these investment strategies involves specific risks which
are described under "Investment Objectives and Policies" and "Additional
Investment Information" herein and under "Investment Objectives and Policies" in
the Statement of Additional Information.
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INVESTMENT OBJECTIVES AND POLICIES
The investment objective of each Portfolio is described below, together with
the policies the Fund employs in its efforts to achieve these objectives. Each
Portfolio's investment objective is a fundamental policy which may not be
changed without the approval of a majority of the Portfolio's outstanding voting
securities. There is no assurance that the Portfolio will attain its objectives.
The investment policies described below are not fundamental policies unless
otherwise noted and may be changed without shareholder approval.
THE FIXED INCOME PORTFOLIO
The Portfolio seeks to produce a high total return consistent with the
preservation of capital by investing primarily in a diversified portfolio of
U.S. Government securities, corporate bonds (including competitively priced
Eurodollar bonds), mortgage-backed securities and other fixed income securities,
such as certificates of deposit and short-term money market instruments. Short-
and intermediate-term bonds form the core of the Portfolio, and long-term bonds
(i.e., those with maturities over ten years) are purchased on a short-term
opportunistic basis when the Adviser believes they will enhance return without
significantly increasing risk. The Adviser sets an annual target rate of return
for the Portfolio based on current and projected market and economic conditions
and manages the Portfolio conservatively -- primarily through gradual shifts in
maturities in attempting to achieve this target rate.
Emphasis in the Portfolio will be on U.S. Government and mortgage-backed
securities. Typically, between 50% and 75% of the Portfolio's total assets will
be invested in these securities. When corporate bonds are purchased, they will
generally be rated in the two highest rating categories by Moody's Investors
Service, Inc. ("Moody's") (Aaa or Aa) or Standard & Poor's Ratings Group ("S&P")
(AAA or AA). The Portfolio will not invest in a corporate security if at the
time of investment the security is not rated at least investment grade by either
rating agency. Although U.S. dollar-denominated securities will represent the
major portion of the Portfolio, up to 15% of the Portfolio may be invested in
foreign currency obligations of corporate and governmental issuers when the
Adviser feels that the currency component and underlying market characteristics
of such obligations will add value to the Portfolio.
Any remaining assets of the Portfolio not invested as described above may be
invested in certain securities or obligations as set forth in "Additional
Investment Information" below.
THE GLOBAL FIXED INCOME PORTFOLIO
The Global Fixed Income Portfolio seeks to produce an attractive real rate
of return while preserving capital by investing in fixed income securities of
U.S. and foreign issuers denominated in U.S. dollars and in other currencies.
The Portfolio seeks to achieve its objectives by investing in U.S. government
securities, foreign government securities, securities of supranational entities,
Eurobonds, and corporate bonds with varying maturities denominated in various
currencies. In selecting portfolio securities, the Adviser evaluates the
currency, market, and individual features of the securities being considered for
investment. At least 65% of the total assets of the Portfolio will be invested
in fixed income securities under normal circumstances.
The Adviser seeks to minimize investment risk by investing only in high
quality debt securities. U.S. Government securities that the Portfolio may
invest in include obligations issued or guaranteed by the U.S. Government, such
as U.S. Treasury securities, as well as those backed by the full-faith and
credit of the U.S., such as obligations of the Government National Mortgage
Association and The Export-Import Bank. The Portfolio
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may also invest in obligations issued or guaranteed by U.S. Government agencies
or instrumentalities where the Portfolio must look principally to the issuing or
guaranteeing agency for ultimate repayment. The Portfolio may invest in
obligations issued or guaranteed by foreign governments and their political
subdivisions, authorities, agencies or instrumentalities, and by supranational
entities (such as the World Bank, The European Economic Community, The Asian
Development Bank and the European Coal and Steel Community). Investment in
foreign government securities will be limited to those of developed nations
which the Adviser believes to pose limited credit risk. These countries
currently include Australia, Austria, Belgium, Canada, Denmark, Finland, France,
Ireland, Italy, Japan, Luxembourg, Netherlands, New Zealand, Norway, Spain,
Sweden, Switzerland, The United Kingdom and Germany. Corporate and supranational
obligations which the Portfolio will invest in will be limited to those rated A
or better by Moody's, S&P or IBCA Ltd., or if unrated, to those that are of
comparable quality in the determination of the Board of Directors and the
Adviser.
The Adviser's approach to multicurrency fixed-income management is strategic
and value-based and designed to produce an attractive real rate of return. The
Adviser's assessment of the bond markets and currencies is based on an analysis
of real interest rates. Current nominal yields of securities are adjusted for
inflation prevailing in each currency sector using an analysis of past and
projected inflation rates. The Portfolio's aim is to invest in bond markets
which offer the most attractive real returns relative to inflation.
The Portfolio will have a neutral investment position in medium-term
securities (i.e., those with a remaining maturity of between three and seven
years) and will respond to changing interest rate levels by shortening or
lengthening portfolio maturity through investment in longer or shorter term
instruments. For example, the Portfolio will respond to high levels of real
interest rates through a lengthening in portfolio maturity. Current and
historical yield spreads among the three main market segments -- the Government,
Foreign and Euro markets -- guide the Adviser's selection of markets and
particular securities within those markets. The analysis of currencies is made
independent of the analysis of markets. Value in foreign exchange is determined
by relative purchasing power parity of a given currency. The Portfolio seeks to
invest in currencies currently undervalued based on purchasing power parity. The
Adviser analyzes current account and capital account performance and real
interest rates to adjust for shorter-term currency flows.
The Portfolio seeks to maintain portfolio turnover at a low level. Although
the Portfolio's primary objective is not to invest for short-term trading, the
Portfolio will seek to take advantage of trading opportunities as they arise to
the extent that they are consistent with the Portfolio's objectives. It is
anticipated that the Portfolio's annual turnover rate will not exceed 100% in
normal circumstances, but the Portfolio's annual turnover rate may exceed 100%.
An annual turnover rate that exceeds 100% involves correspondingly greater
brokerage commissions or transaction costs which will be borne directly by the
Portfolio. In addition, high portfolio turnover may result in more capital gains
which would be taxable to the shareholders of the Portfolio.
The Portfolio will occasionally enter into forward currency exchange
contracts. These are used to hedge foreign currency exchange exposures when
required. See "Forward Currency Exchange Contracts" in this Prospectus and
"Investment Objectives and Policies -- Forward Currency Exchange Contracts" in
the Statement of Additional Information.
Any remaining assets of the Portfolio not invested as described above may be
invested in certain securities or obligations as set forth in "Additional
Investment Information" below.
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THE MUNICIPAL BOND PORTFOLIO
The Portfolio seeks high current income consistent with preservation of
principal through investment in a portfolio consisting primarily of
intermediate- and long-term investment grade Municipal Obligations, the interest
on which is exempt from federal income tax. "Municipal Obligations" include
notes, bonds and other securities issued by or on behalf of states, territories
and possessions of the U.S. and the District of Columbia, and their political
subdivisions, agencies and instrumentalities, the interest on such Obligations,
in the opinion of counsel for the issuer or the Portfolio, is exempt from
federal income tax. See the Statement of Additional Information for a further
description of Municipal Obligations.
The Portfolio will only invest in Municipal Obligations that are "investment
grade securities." Investment grade securities are (i) bonds rated within one of
the four highest rating categories of Moody's (Aaa, Aa, A or Baa) or S&P (AAA,
AA, A or BBB); (ii) notes rated within one of the two highest rating categories
of Moody's (MIG1 or MIG2) or one of the two highest rating categories of S&P
(SP-1 or SP-2); (iii) commercial paper rated P-1 or P-2 by Moody's or A-1 or A-2
by S&P; (iv) variable rate securities rated VMIG1 or VMIG2 by Moody's; and (v)
unrated Municipal Obligations that the Adviser believes are of comparable
quality to securities in the foregoing rating categories. See the Statement of
Additional Information for a further description of these rating categories.
Bonds rated Baa by Moody's or BBB by S&P have speculative characteristics.
Under normal market conditions, the Portfolio will invest at least 80% of
its net assets in Municipal Obligations (or futures contracts or options on
futures relating thereto), which at the time of investment are "investment grade
securities." This policy is fundamental and may not be changed without the
approval of a majority of the Portfolio's outstanding voting securities. In
addition, under normal market conditions, at least 65% of the Portfolio's net
assets will be invested in such Municipal Obligations having an initial maturity
of more than one year.
Although there are no maturity restrictions on the Municipal Obligations in
which the Portfolio invests, it is currently anticipated that the average
maturity of the Portfolio will range between 7 and 20 years. The Adviser will
actively manage the Portfolio, and adjust the average maturity thereof
(including the use of futures contracts and options on futures), depending on
its assessment of the relative yields available on securities of different
maturities and its expectations of future changes in interest rates. During
periods of rising interest rates and declining prices, the average maturity of
the Portfolio may be shorter, while during periods of declining interest rates
and rising prices, the Portfolio may have a longer average maturity.
The Portfolio may also invest up to 20% of its net assets in cash, cash
equivalents, U.S. Government Securities and taxable corporate "investment grade
securities." U.S. Government Securities consist of direct obligations of the
U.S. Treasury and securities issued or guaranteed by agencies or
instrumentalities of the U.S. Government. Securities issued or guaranteed by
agencies or instrumentalities may be backed by the full faith and credit of the
United States (such as securities issued by the Government National Mortgage
Association), or supported by the issuing agency's right to borrow from the U.S.
Treasury (such as Federal Home Loan Banks), or backed only by the credit of the
issuing instrumentality (e.g., the Federal National Mortgage Association). In
addition, for temporary defensive purposes, the Portfolio may invest part or all
of its assets in cash or in short-term securities, including certificates of
deposit, commercial paper, U.S. Government Securities and repurchase agreements
involving such government securities. The Portfolio will not invest more than
20% of its net assets in Municipal Obligations the interest on which is subject
to alternative minimum tax.
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Any remaining assets of the Portfolio not invested as described above may be
invested in certain securities or obligations as set forth in "Additional
Investment Information" below.
THE MORTGAGE-BACKED SECURITIES PORTFOLIO
The Portfolio seeks to produce as high a level of current income as is
consistent with preservation of capital by investment primarily in
mortgage-backed securities either (i) issued or guaranteed by the U.S.
Government or (ii) rated A or higher by Moody's or S&P, or if unrated,
determined by the Adviser to be of comparable quality.
"Mortgage-backed securities" are securities that, directly or indirectly,
represent a participation in, or are secured by and payable from, mortgage loans
on real property, including governmental pass-through securities such as those
issued or guaranteed by the Government National Mortgage Association ("GNMA"),
the Federal National Mortgage Association ("FNMA") and the Federal Home Loan
Mortgage Corporation ("FHLMC"). Unlike GNMA certificates, FNMA and FHLMC
obligations are not backed by the full faith and credit of the U.S. government;
they are supported by the issuing instrumentality's right to borrow from the
U.S. Treasury. Each of GNMA, FNMA and FHLMC guarantees timely distributions of
interest to certificate holders and GNMA and FNMA also guarantee timely
distributions of scheduled principal. Mortgage-backed securities also include
collateralized mortgage obligations ("CMOs") and pass-through securities issued
or guaranteed by private sector entities. CMOs are debt obligations or
pass-through certificates issued by agencies or instrumentalities of the U.S.
government or by private originators or investors in mortgage loans. CMOs are
backed by mortgage pass-through securities or whole loans and are evidenced by a
series of bonds or certificates issued in multiple classes or tranches. Private
pass-through securities are issued by private originators of or investors in
mortgage loans and are structured similarly to governmental pass-through
securities. Because private pass-throughs typically lack a guarantee by an
entity having the credit status of a governmental agency or instrumentality,
they are generally structured with one or more types of credit enhancement. See
the Statement of Additional Information for a further description of
Mortgage-Backed Securities.
The Portfolio will only invest in mortgage-backed securities that are either
(i) issued or guaranteed by the U.S. Government or one of its agencies or
instrumentalities or (ii) at the time of investment rated within one of the
three highest rating categories of Moody's (Aaa, Aa or A) or S&P (AAA, AA or A),
or if unrated, determined by the Adviser to be of comparable quality. Under
normal market conditions, the Adviser expects that at least 75% of the
Portfolio's net assets will be invested in mortgage-backed securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities or rated
Aaa by Moody's or AAA by S&P. Up to 15% of the Portfolio's net assets may be
invested in mortgage-backed securities rated A by Moody's or S&P.
The Adviser expects that short- and intermediate-term mortgage-backed
securities will form the core of the Portfolio, with long-term securities (i.e.,
with maturities over ten years) being purchased when the Adviser believes that
they will enhance return without significantly increasing risk. The Adviser sets
an annual target rate of return for the Portfolio based on current and projected
market and economic conditions and manages the Portfolio conservatively --
primarily through gradual shifts in maturities -- in attempting to achieve this
target rate.
The Portfolio may also invest up to 25% of its net assets in cash, cash
equivalents or other short-term securities, including certificates of deposit,
commercial paper and money market instruments, U.S. Government securities and
repurchase agreements involving such government securities. In addition, the
Portfolio may invest up to all of its assets in cash and such instruments for
temporary defensive purposes.
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Any remaining assets of the Portfolio not invested as described above may be
invested in certain securities or obligations as set forth in "Additional
Investment Information" below.
THE HIGH YIELD PORTFOLIO
The Portfolio seeks to maximize total return by investing in a diversified
portfolio of high yield fixed income securities that offer a yield above that
generally available on debt securities in the three highest rating categories of
the recognized rating services. The Portfolio normally invests between 80% and
100% of its total assets in these higher yielding securities, which generally
entails increased credit and market risk. To mitigate these risks the Portfolio
will diversify its holdings by issuer, industry and credit quality, but
investors should carefully review the section below entitled "Risk Factors
Relating to Investing in High Yield Securities."
Appendix A to this Prospectus sets forth a description of the corporate bond
rating categories of Moody's and S&P. Corporate bonds rated below Baa by Moody's
or BBB by S&P are considered speculative. Securities in the lowest rating
categories may have predominantly speculative characteristics or may be in
default. Ratings of S&P and Moody's represent their opinions of the quality of
bonds and other debt securities they undertake to rate at the time of issuance.
However, ratings are not absolute standards of quality and may not reflect
changes in an issuer's creditworthiness. Accordingly, although the Adviser will
consider ratings, it will perform its own analysis and will not rely principally
on ratings. The Adviser will consider, among other things, the price of the
security, and the financial history and condition, the prospects and the
management of an issuer in selecting securities for the Portfolio. The Portfolio
may buy unrated securities that the Adviser believes are comparable to rated
securities and are consistent with the Portfolio's objective and policies. The
Adviser may vary the average maturity of the securities in the Portfolio without
limit and there is no restriction on the maturity of any individual security.
The Portfolio may acquire fixed income securities of both U.S. and foreign
issuers, including debt obligations (e.g., bonds, debentures, notes, equipment
lease certificates, equipment trust certificates, conditional sales contracts,
commercial paper and obligations issued or guaranteed by the U.S. Government,
any foreign government with which the United States maintains relations or any
of their respective political subdivisions, agencies or instrumentalities) and
preferred stock. The Portfolio may not invest more than 5% of its total assets
at time of acquisition in either (1) equipment lease certificates, equipment
trust certificates and conditional sales contracts or (2) limited partnership
interests. The Portfolio may neither invest more than 10% of its total assets in
foreign securities nor invest more than 5% of its total assets in foreign
governmental issuers in any one country. The Portfolio's fixed income securities
may have equity features, such as conversion rights or warrants, and the
Portfolio may invest up to 10% of its total assets in equity securities other
than preferred stock (common stocks, warrants and rights and limited partnership
interests). The Portfolio may invest up to 20% of its total assets in fixed
income securities that are investment grade (i.e., rated in one of the top three
categories or comparable) and have maturities of one year or less. For temporary
defensive purposes, the Portfolio may invest part or all of its total assets in
cash or in short-term securities, including certificates of deposit, commercial
paper, notes, obligations issued or guaranteed by the U.S. Government or any of
its agencies or instrumentalities, and repurchase agreements involving such
government securities. The Portfolio may invest in or own securities of
companies in various stages of financial restructuring, bankruptcy or
reorganization which are not currently paying interest or dividends. The total
value, at time of purchase, of the sum of all such securities will not exceed
10% of the value of the Portfolio's total assets.
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The Portfolio may also invest in zero coupon, pay-in-kind or deferred
payment securities. Zero coupon securities are securities that are sold at a
discount to par value and securities on which interest payments are not made
during the life of the security. Upon maturity, the holder is entitled to
receive the par value of the security. While interest payments are not made on
such securities, holders of such securities are deemed to have received "phantom
income" annually. Because the Portfolio will distribute its "phantom income" to
shareholders, to the extent that shareholders elect to receive dividends in cash
rather than reinvesting such dividends in additional shares of the Portfolio, it
will have fewer assets with which to purchase income producing securities. The
Portfolio accrues income with respect to these securities prior to the receipt
of cash payments. Pay-in-kind securities are securities that have interest
payable by delivery of additional securities. Upon maturity, the holder is
entitled to receive the aggregate par value of the securities. Deferred payment
securities are securities that remain zero coupon securities until a
predetermined date, at which time the stated coupon rate becomes effective and
interest becomes payable at regular intervals. Zero coupon, pay-in-kind and
deferred payment securities may be subject to greater fluctuation in value and
lesser liquidity in the event of adverse market conditions than comparably rated
securities paying cash interest at regular interest payment periods.
Any remaining assets of the Portfolio not invested as described above may be
invested in certain securities or obligations as set forth in "Additional
Investment Information" below.
RISK FACTORS RELATING TO INVESTING IN HIGH YIELD SECURITIES. Fixed income
securities are subject to the risk of an issuer's inability to meet principal
and interest payments on the obligations (credit risk), and may also be subject
to price volatility due to such factors as interest rate sensitivity, market
perception of the creditworthiness of the issuer and general market liquidity
(market risk). Lower rated or unrated (i.e., high yield) securities are more
likely to react to developments affecting market and credit risk than are more
highly rated securities, which react to movements in the general level of
interest rates primarily. The market values of fixed-income securities tend to
vary inversely with the level of interest rates. Yields and market values of
high yield securities will fluctuate over time, reflecting not only changing
interest rates but the market's perception of credit quality and the outlook for
economic growth. When economic conditions appear to be deteriorating, medium to
lower rated securities may decline in value due to heightened concern over
credit quality, regardless of prevailing interest rates. Fluctuations in the
value of the Portfolio's investments will be reflected in the Portfolio's net
asset value per share. The Adviser considers both credit risk and market risk in
making investment decisions for the Portfolio. Investors should carefully
consider the relative risks of investing in high yield securities and understand
that such securities are not generally meant for short-term investing.
The high yield market is still relatively new and its recent growth
parallels a long period of economic expansion and an increase in merger,
acquisition and leveraged buyout activity. Adverse economic developments may
disrupt the market for high yield securities, and severely affect the ability of
issuers, especially highly leveraged issuers, to service their debt obligations
or to repay their obligations upon maturity. In addition, the secondary market
for high yield securities, which is concentrated in relatively few market
makers, may not be as liquid as the secondary market for more highly rated
securities. As a result, the Adviser could find it more difficult to sell these
securities or may be able to sell the securities only at prices lower than if
such securities were widely traded. Prices realized upon the sale of such lower
rated or unrated securities, under these circumstances, may be less than the
prices used in calculating the Portfolio's net asset value.
Prices for high yield securities may be affected by legislative and
regulatory developments. These laws could adversely affect the Portfolio's net
asset value and investment practices, the secondary market for high
21
<PAGE>
yield securities, the financial condition of issuers of these securities and the
value of outstanding high yield securities. For example, federal legislation
requiring the divestiture by federally insured savings and loan associations of
their investments in high yield bonds and limiting the deductibility of interest
by certain corporate issuers of high yield bonds adversely affected the market
in recent years.
Lower rated or unrated debt obligations also present risks based on payment
expectations. If an issuer calls the obligations for redemption, the Fund may
have to replace the security with a lower yielding security, resulting in a
decreased return for investors. If the Portfolio experiences unexpected net
redemptions, it may be forced to sell its higher rated securities, resulting in
a decline in the overall credit quality of the Portfolio's investment portfolio
and increasing the exposure of the Portfolio to the risks of high yield
securities.
The table below provides a summary of ratings assigned by S&P to debt
obligations in the High Yield Portfolio. These figures are dollar-weighted
averages of month-end portfolio holdings during the fiscal year ended December
31, 1995, presented as a percentage of total investments. These percentages are
historical and are not necessarily indicative of the quality of current or
future portfolio holdings, which may vary.
<TABLE>
<CAPTION>
S&P
- ----------------
RATING AVERAGE
- ------- -------
<S> <C>
A 0.21%
-------
BBB 0.03%
-------
BB 18.50%
-------
B 47.27%
-------
CCC 7.27%
-------
CC 1.07%
-------
Unrated 21.03%
-------
</TABLE>
THE MONEY MARKET PORTFOLIO
The Portfolio's investment objectives are to maximize current income and
preserve capital while maintaining high levels of liquidity through investing in
the following high quality money market instruments which have effective
maturities of one year or less. The Portfolio's average maturity (on a
dollar-weighted basis) will not exceed 90 days. The Portfolio will purchase only
securities having a remaining maturity of one year or less. The Portfolio is
expected to maintain a net asset value of $1.00 per share. There can be no
assurance, however, that the Portfolio will be successful in maintaining a net
asset value of $1.00 per share. See "Valuation of Shares."
UNITED STATES GOVERNMENT OBLIGATIONS. The Money Market Portfolio may invest
in obligations issued or guaranteed by the United States Government, such as
U.S. Treasury securities and those backed by the full faith and credit of the
United States, such as obligations of GNMA, the Farmers Home Administration and
the Export-Import Bank. The Portfolio may also invest in obligations issued or
guaranteed by United States Government agencies or instrumentalities where the
Portfolio must look principally to the issuing or guaranteeing agency for
ultimate repayment; some examples of agencies or instrumentalities issuing these
obligations are the Federal Farm Credit System and the Federal Home Loan Banks.
22
<PAGE>
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities in which the Money
Market Portfolio may invest, such as GNMA securities, differ from other fixed
income securities in that the principal is paid back by the borrower over the
life of the loan rather than returned in a lump sum at maturity. When prevailing
interest rates rise, the value of a GNMA security may decrease as do other debt
securities. When prevailing interest rates decline, however, the value of GNMA
securities may not rise on a comparable basis with other debt securities because
of the prepayment feature of GNMA securities. Additionally, if a GNMA
certificate is purchased at a premium above its principal value because its
fixed rate of interest exceeds the prevailing level of yields, the decline in
price to par may result in a loss of the premium in the event of prepayment.
Funds received from prepayments may be reinvested at the prevailing interest
rates which may be lower than the rate of interest that had previously been
earned.
BANK OBLIGATIONS. The Money Market Portfolio may invest in high quality
U.S. dollar-denominated negotiable certificates of deposit, time deposits,
deposit notes and bankers' acceptances of (i) banks, savings and loan
associations and savings banks which have more than $2 billion in total assets
and are organized under United States Federal or state law, (ii) foreign
branches of these banks ("Euros") and (iii) U.S. branches of foreign banks of
equivalent size ("Yankees"). See "Additional Investment Information" for further
information on foreign investments. The Portfolio may also invest in obligations
of the International Bank for Reconstruction and Development ("World Bank").
These obligations are supported by appropriated but unpaid commitments of the
World Bank's member countries, and there is no assurance these commitments will
be undertaken or met in the future.
COMMERCIAL PAPER; CORPORATE BONDS. The Money Market Portfolio may invest in
high quality commercial paper and corporate bonds issued by U.S. corporations.
The Portfolio may also invest in commercial paper issued by foreign corporations
if the issuer is a direct subsidiary of a U.S. corporation, the obligation is
U.S. dollar-denominated and is not subject to foreign withholding tax, and the
aggregate of these foreign investments does not exceed 10% of the Portfolio's
net assets. For more information about foreign investments, see "Additional
Investment Information."
QUALITY INFORMATION. The Money Market Portfolio utilizes the amortized cost
method of valuation in accordance with regulations issued by the Securities and
Exchange Commission. See "Valuation of Shares." Accordingly, the Portfolio will
limit its portfolio investments to those instruments that present minimal credit
risks and are of "eligible quality" as determined by the Adviser under the
supervision of the Board of Directors in accordance with regulations of the
Securities and Exchange Commission, as they may from time to time be amended.
For this purpose, "eligible quality" means a security rated (i) in one of the
two highest rating categories by at least two nationally recognized statistical
rating organizations assigning a rating to the security or issuer or, (ii) if
only one rating organization assigned a rating, by that rating organization or
(iii) if unrated, of comparable quality as determined by the Board of Directors.
Among the criteria adopted by the Board of Directors, the Money Market Portfolio
will not purchase any bank or corporate obligation unless it is rated at least
Aa or Prime-1 by Moody's or AA or A-1 by S&P, or it is unrated, and in the
determination of the Board of Directors and the Adviser, it is of comparable
quality. Ratings, however, are not the only criteria utilized under the
procedures adopted by the Board of Directors. For a more detailed discussion of
other quality requirements applicable to the Portfolio, see "Description of
Securities and Ratings and Policies" in the Statement of Additional Information.
23
<PAGE>
These standards must be satisfied at the time an investment is made. In the
event that an investment held by the Portfolio is assigned a lower rating or
ceases to be rated, the Adviser under the supervision of the Board of Directors
will promptly reassess whether such security presents minimal credit risk and
whether the Portfolio should continue to hold the security in its portfolio. If
a portfolio security no longer presents minimal credit risk or is in default,
the Portfolio will dispose of the security as soon as reasonably practicable
unless the Board of Directors determines that to do so is not in the best
interests of the Portfolio.
Any remaining assets of the Portfolio not invested as described above may be
invested in certain securities or obligations as set forth in "Additional
Investment Information" below.
THE MUNICIPAL MONEY MARKET PORTFOLIO
The Portfolio's investment objectives are to maximize current income that is
exempt from federal income tax and preserve capital while maintaining high
levels of liquidity through investing in the following high quality municipal
money market instruments which, in the opinion of bond counsel for the issuer,
earn interest exempt from federal income tax. The Portfolio will purchase only
securities having a remaining maturity of one year or less. Under normal
circumstances, the Portfolio will invest at least 80% of its assets in
tax-exempt municipal securities. Additionally, the Portfolio will not purchase
private activity bonds, the interest from which is subject to the alternative
minimum tax. Interest on tax-exempt municipal securities may be subject to state
and local taxes. See "Taxes." The Portfolio's average maturity (on a
dollar-weighted basis) will not exceed 90 days. The Portfolio is expected to
maintain a net asset value of $1.00 per share. There can be no assurance,
however, that the Portfolio will be successful in maintaining a net asset value
of $1.00 per share. See "Valuation of Shares."
MUNICIPAL BONDS. The Portfolio may invest in bonds issued by or on behalf
of states, territories and possessions of the U.S. and its political
subdivisions, agencies, authorities and instrumentalities. These obligations may
be general obligation bonds secured by the issuer's pledge of its full faith,
credit and taxing power for the payment of principal and interest, or they may
be revenue bonds payable from specific revenue sources, but not generally backed
by the issuer's taxing power. These obligations include private activity bonds
where payment is the responsibility of the private industrial user of the
facility financed by the bonds. The Portfolio may invest more than 25% of its
total assets in private activity bonds (provided that the interest on such bonds
is not subject to the alternative minimum tax), but may not invest more than 25%
of its total assets in these bonds in projects of similar type or in the same
state.
MUNICIPAL NOTES. The Portfolio may also invest in municipal notes of
various types, including notes issued in anticipation of receipt of taxes, the
proceeds of the sale of bonds, other revenues or grant proceeds and project
notes, as well as municipal commercial paper and municipal demand obligations.
There may be no secondary market for project notes, and it is the intention of
the Fund to hold such notes until maturity. There is no specific percentage
limitation on these investments. For more information about municipal notes, see
"Description of Securities and Ratings" in the Statement of Additional
Information.
QUALITY INFORMATION. The Portfolio utilizes the amortized cost method of
valuation in accordance with regulations issued by the Securities and Exchange
Commission. See "Valuation of Shares." Accordingly, the Portfolio will limit its
portfolio investments to those instruments which present minimal credit risk and
which are of "eligible quality" as determined by the Adviser under the
supervision of the Board of Directors in accordance with regulations of the
Securities and Exchange Commission, as they may from time to time be amended.
For this purpose, "eligible quality" means a security rated (i) in one of the
two highest rating
24
<PAGE>
categories by at least two nationally recognized statistical rating
organizations assigning a rating to the security or issuer or, (ii) if only one
rating organization assigned a rating, by that rating organization or (iii) if
unrated, of comparable quality as determined by the Board of Directors. Among
the criteria adopted by the Board of Directors, the Municipal Money Market
Portfolio will not purchase any municipal obligation unless it is rated at least
Aa, MIG-1 (or MIG-2 in the case of New York State municipal notes), or Prime-1
by Moody's, or AA, SP-1 or A-1 by S&P, or it is unrated, and in the
determination of the Board of Directors and the Adviser it is of comparable
quality. Ratings, however, are not the only criteria which must be utilized
under the procedures adopted by the Board of Directors. For a more detailed
discussion of quality requirements applicable to municipal commercial paper and
master demand obligations, see the "Description of Securities and Ratings" in
the Statement of Additional Information.
These standards must be satisfied at the time an investment is made. In the
event that an investment held by the Portfolio is assigned a lower rating or
ceases to be rated, the Adviser under the supervision of the Board of Directors
will promptly reassess whether such security presents minimal credit risk and
whether the Portfolio should continue to hold the security in its portfolio. If
a portfolio security no longer presents minimal credit risk or is in default,
the Portfolio will dispose of the security as soon as reasonably practicable
unless the Board of Directors determines that to do so is not in the best
interests of the Portfolio. The credit quality of municipal obligations is
frequently enhanced by various arrangements with domestic or foreign financial
institutions, such as letters of credit, guarantees and insurance, and these
arrangements are considered when investment quality is evaluated.
PUTS FOR THE MUNICIPAL MONEY MARKET PORTFOLIO. The Portfolio may purchase
without limit municipal bonds or notes together with the right to resell them at
an agreed price or yield within a specified period prior to maturity. This right
to resell is known as a "put". The aggregate price paid for securities with puts
may be higher than the price which otherwise would be paid. The purpose of this
practice is to permit the Portfolio to be fully invested in tax-exempt
securities while maintaining the necessary liquidity to purchase securities on a
when-issued basis, to meet unusually large redemptions, to purchase at a later
date securities other than those subject to the put and to facilitate the
Adviser's ability to manage the Portfolio actively. The principal risk of puts
is that the put writer may default on its obligation to repurchase. The Adviser
will monitor each writer's ability to meet its obligations under puts. Under the
supervision of the Board of Directors, the Adviser will purchase securities with
puts only to the extent that such purchase is consistent with the Portfolio's
investment policies.
The amortized cost method is used by the Portfolio to value all municipal
securities; no value is assigned to any puts. The cost of any such put is
carried as an unrealized loss from the time of purchase until it is exercised or
expires.
Any remaining assets of the Portfolio not invested as described above may be
invested in certain securities or obligations as set forth in "Additional
Investment Information" below.
25
<PAGE>
ADDITIONAL INVESTMENT INFORMATION
FOREIGN INVESTMENT. The Fixed Income and High Yield Portfolios may invest
in U.S. dollar-denominated securities of foreign issuers trading in U.S. markets
and in non-U.S. dollar-denominated obligations of foreign issuers. The Money
Market Portfolio may invest in U.S. dollar-denominated commercial paper issued
by a foreign corporation that is a direct parent or subsidiary of a U.S.
corporation. Investment in obligations of foreign issuers and in foreign
branches of domestic banks involves somewhat different investment risks than
those affecting obligations of U.S. issuers. There may be limited publicly
available information with respect to foreign issuers, and foreign issuers are
not generally subject to uniform accounting, auditing and financial standards
and requirements comparable to those applicable to domestic companies. Brokerage
commissions and other transaction costs on foreign securities exchanges are
generally higher than in the U.S. Dividends and interest paid by foreign issuers
may be subject to withholding and other foreign taxes, which may decrease the
net return on foreign investments as compared to dividends and interest paid to
the Portfolio by domestic companies. It is not expected that a Portfolio or its
shareholders would be able to claim a credit for U.S. tax purposes with respect
to any such foreign taxes. See "Taxes." Additional risks include future
political and economic developments, the possibility that a foreign jurisdiction
might impose or change withholding taxes on income payable with respect to
foreign securities, possible seizure, nationalization or expropriation of the
foreign issuer or foreign deposits, and the possible adoption of foreign
governmental restrictions such as exchange controls. Many of the foreign
countries described above may have less stable political environments than more
developed countries. Also, it may be more difficult to obtain a judgment in a
court outside the United States.
Investments in securities of foreign issuers are frequently denominated in
foreign currencies and the Portfolios may temporarily hold uninvested reserves
in bank deposits in foreign currencies. Therefore, the value of each Portfolio's
assets as measured in U.S. dollars may be affected favorably or unfavorably by
changes in currency rates and in exchange control regulations, and the
Portfolios may incur costs in connection with conversions between various
currencies.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The Fixed Income, Global Fixed
Income and High Yield Portfolios may enter into forward foreign currency
exchange contracts ("forward contracts") that provide for the purchase or sale
of an amount of a specified currency at a future date. Purposes for which such
contracts may be used include protecting against a decline in a foreign currency
against the U.S. dollar between the trade date and settlement date when the
Portfolio purchases or sells securities, locking in the U.S. dollar value of
dividends and interest on securities held by the Portfolio and generally
protecting the U.S. dollar value of securities held by a Portfolio declared
against exchange rate fluctuation. Such contracts may also be used as a
protective measure against the effects of fluctuating rates of currency exchange
and exchange control regulations. While such forward contracts may limit losses
to a portfolio as a result of exchange rate fluctuations, they will also limit
any gains that may otherwise have been realized. See "Investment Objectives and
Policies -- Forward Currency Exchange Contracts" in the Statement of Additional
Information. Except in circumstances where segregated accounts are not required
by the 1940 Act and the rules adopted thereunder, the Portfolio's Custodian will
place cash, U.S. government securities, or high-grade debt securities into a
segregated account of a Portfolio in an amount equal to the value of such
Portfolio's total assets committed to the consummation of forward foreign
currency exchange contracts. If the value of the securities placed in the
segregated account declines, additional cash or securities will be placed in the
account on a daily basis so that the value of the
26
<PAGE>
account will be at least equal to the amount of such Portfolio's commitments
with respect to such contracts. See "Investment Objectives and Policies --
Forward Foreign Currency Exchange Contracts" in the Statement of Additional
Information.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. In order to remain
fully invested and to reduce transaction costs, each Portfolio, except the
Global Fixed Income Portfolio, may utilize appropriate stock futures contracts
and options on futures contracts to a limited extent. Because transaction costs
associated with futures and options may be lower than the costs of investing in
stocks directly, it is expected that the use of index futures and options to
facilitate cash flows may reduce a Portfolio's overall transaction costs. The
Portfolios will engage in futures and options on futures transactions only for
hedging purposes.
Each Portfolio may enter into futures contracts and options on futures
provided that not more than 5% of its total assets are required as deposit to
secure obligations under such contracts, and provided further that not more than
20% of its total assets are invested, in the aggregate, in futures contracts and
options on futures.
The primary risks associated with the use of futures and options on futures
are (i) imperfect correlation between the change in market value of the stocks
held by the Portfolio and the prices of futures and options relating to the
stocks purchased or sold by the Portfolio; and (ii) possible lack of a liquid
secondary market for a futures contract and the resulting inability to close a
futures position which could have an adverse impact on the Portfolio's ability
to hedge. In the opinion of the Board of Directors, the risk that the Portfolio
will be unable to close out a futures position or options contract will be
minimized by only entering into futures contracts or options transactions for
which there appears to be a liquid secondary market. For more detailed
information about futures transactions, see "Investment Objectives and Policies"
in the Statement of Additional Information.
LOANS OF PORTFOLIO SECURITIES. Each Portfolio may lend its securities to
brokers, dealers, domestic and foreign banks or other financial institutions for
the purpose of increasing its net investment income. These loans must be secured
continuously by cash or equivalent collateral or by a letter of credit at least
equal to the market value of the securities loaned plus accrued interest or
income. There may be risks of delay in recovery of the securities or even loss
of rights in the collateral should the borrower of the securities fail
financially. A Portfolio will not enter into securities loan transactions
exceeding, in the aggregate, 33 1/3% of the market value of the Portfolio's
total assets. For more detailed information about securities lending see
"Investment Objectives and Policies" in the Statement of Additional Information.
MONEY MARKET INSTRUMENTS. The Portfolios are permitted to invest in money
market instruments, although each Portfolio intends to stay invested in
securities satisfying its primary investment objective to the extent practical.
Each Portfolio may make money market investments pending other investment or
settlement for liquidity, or in adverse market conditions. The money market
investments permitted for the Portfolios include obligations of the U.S.
Government and its agencies and instrumentalities, obligations of foreign
sovereignties, other debt securities, commercial paper including bank
obligations, certificates of deposit (including Eurodollar certificates of
deposit) and repurchase agreements. For more detailed information about these
money market investments, see "Description of Securities and Ratings" in the
Statement of Additional Information.
NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED
SECURITIES. The High-Yield Portfolio may not invest more than 15% of its net
assets in illiquid securities, including securities for which there is no
readily available securities market nor more than 10% of its total assets in
securities that are restricted from sale
27
<PAGE>
to the public without registration ("Restricted Securities") under the
Securities Act of 1933 (the "1933 Act"). Nevertheless, subject to the foregoing
limit on illiquid securities, the Portfolio may invest up to 20% of its total
assets in Restricted Securities that can be offered and sold to qualified
institutional buyers under Rule 144A under that Act ("144A Securities"). The
Board of Directors has adopted guidelines and delegated to the Adviser, subject
to the supervision of the Board of Directors, the daily function of determining
and monitoring the liquidity of 144A securities. Rule 144A securities may become
illiquid if qualified institutional buyers are not interested in acquiring the
securities. Investors should note that investments in excess of 5% of the
Portfolio's total assets may be considered a speculative activity and may
involve greater risk and expense to the Portfolio.
REPURCHASE AGREEMENTS. Each Portfolio may enter into repurchase agreements
with brokers, dealers or banks that meet the credit guidelines of the Fund's
Board of Directors. In a repurchase agreement, a Portfolio buys a security from
a seller that has agreed to repurchase it at a mutually agreed upon date and
price, reflecting the interest rate effective for the term of the agreement. The
term of these agreements is usually from overnight to one week and never exceeds
one year. Repurchase agreements may be viewed as a fully collateralized loan of
money by the Portfolio to the seller. The Portfolio always receives securities
with a market value at least equal to the purchase price (including accrued
interest) as collateral, and this value is maintained during the term of the
agreement. If the seller defaults and the collateral value declines, the
Portfolio might incur a loss. If bankruptcy proceedings are commenced with
respect to the seller, the Portfolio's realization upon the collateral may be
delayed or limited. The aggregate of certain repurchase agreements and certain
other investments is limited as set forth under "Investment Limitations."
REVERSE REPURCHASE AGREEMENTS FOR THE MONEY MARKET PORTFOLIO. The Money
Market Portfolio may enter into reverse repurchase agreements with brokers,
dealers, domestic and foreign banks or other financial institutions. In a
reverse repurchase agreement, the Portfolio sells a security and agrees to
repurchase it at a mutually agreed upon date and price, reflecting the interest
rate effective for the term of the agreement. It may also be viewed as the
borrowing of money by the Portfolio. The Portfolio's investment of the proceeds
of a reverse repurchase agreement is the speculative factor known as leverage.
The Portfolio may enter into a reverse repurchase agreement only if the interest
income from investment of the proceeds is greater than the interest expense of
the transaction and the proceeds are invested for a period no longer than the
term of the agreement. The Portfolio will maintain with the Custodian a separate
account with a segregated portfolio of securities at least equal to its purchase
obligations under these agreements. If interest rates rise during a reverse
repurchase agreement, it may adversely affect the Portfolio's ability to
maintain a stable net asset value. The aggregate of these agreements is limited
as set forth under "Investment Limitations." Reverse repurchase agreements are
considered to be borrowings and are subject to the percentage limitations on
borrowings set forth in "Investment Limitations."
TAXABLE INVESTMENTS FOR THE MUNICIPAL BOND AND MUNICIPAL MONEY MARKET
PORTFOLIOS. The Municipal Bond and Municipal Money Market Portfolios attempt to
invest 80% and 100%, respectively, of their assets in tax-exempt municipal
securities. However, the Portfolios are permitted to invest up to 20% of the
value of their total assets in securities, the interest income of which is
subject to federal income tax. Either Portfolio may make taxable investments
pending investment of proceeds from sales of its shares or portfolio securities
or pending settlement of purchases of portfolio securities in order to maintain
liquidity to meet redemptions or when it is advisable in the Adviser's opinion
because of adverse market conditions. The taxable investments permitted for
28
<PAGE>
either Portfolio include obligations of the U.S. Government and its agencies and
instrumentalities, bank obligations, commercial paper and repurchase agreements.
Fees from loans of tax-exempt securities will also be taxable income of the
Portfolio. See "Taxes."
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each Portfolio may purchase
securities on a when-issued or delayed delivery basis. In such transactions,
instruments are bought with payment and delivery taking place in the future in
order to secure what is considered to be an advantageous yield or price at the
time of the transaction. Delivery of and payment for these securities may take
as long as a month or more after the date of the purchase commitment but will
take place no more than 120 days after the trade date. Each Portfolio will
maintain with the Custodian a separate account with a segregated portfolio of
high-grade debt securities or cash in an amount at least equal to these
commitments. The payment obligation and the interest rates that will be received
are each fixed at the time a Portfolio enters into the commitment and no
interest accrues to the Portfolio until settlement. Thus, it is possible that
the market value at the time of settlement could be higher or lower than the
purchase price if the general level of interest rates has changed. It is a
fundamental policy of the Money Market Portfolio and a current policy of the
Municipal Money Market Portfolio not to enter into when-issued commitments
exceeding, in the aggregate, 15% of the market value of the Portfolio's total
assets less liabilities other than the obligations created by these commitments.
INVESTMENT LIMITATIONS
As a diversified investment company, each Portfolio, except the Global Fixed
Income Portfolio, is subject to the following limitations: (a) as to 75% of its
total assets, a Portfolio may not invest more than 5% of its total assets in the
securities of any one issuer, except obligations of the U.S. Government and its
agencies and instrumentalities, and (b) a Portfolio may not own more than 10% of
the outstanding voting securities of any one issuer.
The Global Fixed Income Portfolio is a non-diversified investment company
under the Investment Company Act of 1940, as amended (the "1940 Act"), which
means the Global Fixed Income Portfolio is not limited by the 1940 Act in the
proportion of its total assets that may be invested in the obligations of a
single issuer. Thus, the Global Fixed Income Portfolio may invest a greater
proportion of its total assets in the securities of a smaller number of issuers
and, as a result, will be subject to greater risk with respect to its portfolio
securities. The Global Fixed Income Portfolio, however, intends to comply with
the diversification requirements imposed by the Internal Revenue Code of 1986,
as amended (the "Code"), for qualification as a regulated investment company.
See "Taxes."
Each Portfolio also operates under certain investment restrictions that are
deemed fundamental limitations and may be changed only with the approval of the
holders of a majority of such Portfolio's outstanding shares. See "Investment
Limitations" in the Statement of Additional Information. In addition, each
Portfolio operates under certain non-fundamental investment limitations as
described below and in the Statement of Additional Information. Each Portfolio
may not (i) enter into repurchase agreements with more than seven days to
maturity if, as a result, more than 15% of the market value of the Portfolio's
net assets would be invested in such repurchase agreements and other investments
for which market quotations are not readily available or which are otherwise
illiquid, except that the limitation is 5% for the Municipal Money Market
Portfolio; (ii) borrow money, except from banks for extraordinary or emergency
purposes, and then only in amounts up to 10% (which includes reverse repurchase
agreements) of the value of the Portfolio's total assets, taken at cost at the
time of borrowing; or purchase securities while borrowings exceed 5% (which
includes reverse repurchase agreements)
29
<PAGE>
of its total assets; (iii) or mortgage, pledge or hypothecate any assets except
in connection with any such borrowing in amounts up to 10% of the value of the
Portfolio's net assets at the time of borrowing; (iv) invest in fixed time
deposits with a duration of over seven calendar days; or (v) invest in fixed
time deposits with a duration of from two business days to seven calendar days
if more than 5% of the Portfolio's total assets would be invested in these
deposits. Furthermore, the Money Market Portfolio may not enter into reverse
repurchase agreements exceeding, in the aggregate, one-third of the market value
of the Portfolio's total assets, less liabilities other than obligations created
by these agreements; and the Municipal Money Market Portfolio may not purchase
private activity bonds if, as a result, more than 5% of the Portfolio's total
assets would be invested in private activity bonds where payment of principal
and interest are the responsibility of companies with fewer than three years of
operating history (including predecessors).
MANAGEMENT OF THE FUND
INVESTMENT ADVISER. Morgan Stanley Asset Management Inc. is the Investment
Adviser and Administrator of the Fund and each of its portfolios. The Adviser
provides investment advice and portfolio management services pursuant to an
Investment Advisory Agreement and, subject to the supervision of the Fund's
Board of Directors, makes the portfolio's day-to-day investment decisions,
arranges for the execution of portfolio transactions and generally manages the
portfolio's investments. The Adviser is entitled to receive from each Portfolio
an annual management fee, payable quarterly, equal to the percentage of average
daily net assets of the respective Portfolio set forth in the table below.
However, the Adviser has agreed to a reduction in the fees payable to it as
Adviser, and to reimburse the Portfolios, if necessary, if such fees would cause
the total annual operating expenses of any Portfolio to exceed the maximum set
forth in the table below.
<TABLE>
<CAPTION>
MAXIMUM TOTAL OPERATING EXPENSES
AFTER FEE WAIVERS
MANAGEMENT FEE ----------------------------------------
PORTFOLIO ABSENT FEE WAIVERS CLASS A CLASS B
- -------------------------------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C>
Fixed Income 0.35% 0.45% 0.70%
Global Fixed Income 0.40% 0.50% 0.75%
Municipal Bond 0.35% 0.45% 0.70%
Mortgage-Backed Securities 0.35% 0.45% 0.70%
High Yield 0.50% 0.75% 1.00%
Money Market 0.30% 0.55% N/A
Municipal Money Market 0.30% 0.57% N/A
</TABLE>
The Adviser, with principal offices at 1221 Avenue of the Americas, New
York, New York 10020, conducts a worldwide portfolio management business,
providing a broad range of portfolio management services to customers in the
U.S. and abroad. At December 31, 1995, the Adviser, together with its affiliated
asset management companies, managed investments totaling approximately $57.4
billion, including approximately $41.9 billion under active management and $15.5
billion as Named Fiduciary or Fiduciary Adviser. See "Management of the Fund" in
the Statement of Additional Information.
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PORTFOLIO MANAGERS. The following persons have primary responsibility for
managing the Portfolios indicated.
FIXED INCOME PORTFOLIO -- WARREN ACKERMAN, III. Warren Ackerman is a
Principal of the Advisor and a Senior Fixed Income Portfolio Manager. Mr.
Ackerman joined the Advisor in December 1993. Prior to joining the Advisor, Mr.
Ackerman spent over 14 years with Bankers Trust Company as a Managing Director
responsible for institutional active fixed income management. Prior to Bankers,
he spent almost seven years as a Vice President with Irving Trust Company in the
Trust Investment Division. Mr. Ackerman is a graduate of Monmouth College with a
B.S. in Economics. Mr. Ackerman has had primary responsibility for managing the
Portfolio's assets since March 1994.
GLOBAL FIXED INCOME PORTFOLIO -- MICHAEL J. SMITH AND ROBERT M. SMITH.
Michael Smith joined the Adviser as a Fixed Income Manager in 1990. Mr. Smith
became a Vice President of Morgan Stanley in 1992 and has been primarily
responsible for managing the Portfolio's assets since January 1993. He was
previously employed by Gartmore Investment Management where he had day-to-day
responsibility for the management of global and European fixed-income and money
market funds. Prior to his three years at Gartmore, Mr. Smith spent four years
with Legal & General Investment as an analyst and fund manager responsible for
the fixed-income portion of several large segregated funds. Mr. Smith is a
graduate of Exeter University, England. Robert Smith joined the Adviser as Vice
President in June 1994 and has been primarily responsible for managing the
Portfolio's assets since July 1994. Prior to joining the Adviser he spent eight
years as Senior Portfolio Manager -- Fixed Income at the State of Florida
Pension Fund. Mr. Smith's responsibilities included active total-rate-of-return
management of long term portfolios and supervision of other fixed income
managers. A graduate of Florida State University with a B.S. in Business, Mr.
Smith also received an M.B.A. -- Finance from Florida State and holds a
Chartered Financial Analyst (CFA) designation.
MUNICIPAL BOND PORTFOLIO -- LORI A. COHANE. Lori A. Cohane joined the
Adviser in 1994 as a Vice President and Municipal Bond Portfolio Manager. Prior
to joining the Adviser, Ms. Cohane spent eight years with Salomon Brothers Asset
Management as a Vice President, Portfolio Manager and Senior Credit Analyst of
municipal bond accounts managing portfolios for high net worth individuals,
open- and closed-end bond funds and institutional accounts. Ms. Cohane is a
magna cum laude graduate of the State University of New York at Albany with a
B.S. degree in Finance and Economics. Ms. Cohane has had primary responsibility
for managing the Portfolio's assets since its inception.
MORTGAGE-BACKED SECURITIES PORTFOLIO -- WARREN ACKERMAN, III. Information
about Mr. Ackerman is included under Fixed Income Portfolio above. Mr. Ackerman
has had primary responsibility for managing the Portfolio's assets since its
inception.
HIGH YIELD PORTFOLIO -- ROBERT ANGEVINE. Robert Angevine is a Principal of
the Adviser and the Portfolio Manager for high yield investments. Prior to
joining the Adviser in October 1988, he spent over eight years at Prudential
Insurance where he was responsible for the largest open-end high yield mutual
fund in the country. Mr. Angevine also manages high yield assets for one of the
largest corporate pension funds in the country. His other experience includes
international treasury operations at a major pharmaceutical company and
commercial banking. Mr. Angevine received an M.B.A. from Fairleigh Dickinson
University and a B.A. in Economics from Lafayette College. He served two years
as a Lieutenant in the U.S. Army. Mr. Angevine has had primary responsibility
for managing the Portfolio's assets since September, 1992.
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MONEY MARKET PORTFOLIO -- GERALD BARTH, ABIGAIL JONES FEDER AND KENNETH R.
HOLLEY. Gerald P. Barth joined the Adviser in 1987 to establish the short- to
intermediate-term taxable cash management area and to manage the tax-exempt
municipal bond portfolio. He became a Vice President in 1989 and a Principal in
1991. He has had primary management responsibility for the Investment Fund since
its inception. Prior to joining the Adviser, Mr. Barth was Director of
Investments at Subaru of America for five years, where he managed both the
short- and intermediate-term corporate cash portfolios. He began his career at
Arthur Andersen in the audit department and spent two years in the tax
department. He earned a B.S. in Accounting from LaSalle College and became a
Certified Public Accountant in 1977. Abigail Feder is a Principal in the
Adviser's Fixed Income Group. She is responsible for managing short-term taxable
and tax-exempt portfolios. Ms. Feder joined Morgan Stanley's Corporate Finance
Department in 1985. In 1987 she joined the Adviser as a Marketing Analyst and
was promoted to a Marketing Director in 1988. She joined the Fixed Income Group
as a Portfolio Manager in 1989 and she became a Vice President in 1992. Ms.
Feder holds a B.A. from Vassar College. Kenneth R. Holley joined the Adviser as
a short-term fixed income portfolio manager in July, 1993. Prior thereto, he
worked for 2 1/2 years as a Finance Officer for the African Development Bank
implementing trading strategies for the bank's $1 billion short to intermediate
U.S. dollar portfolio. Prior to joining the ADB, Mr. Holley spent 1 1/2 years
with Ward and Associates Asset Management as a Vice President responsible for
fixed income strategy. Before Ward and Associates he worked in the fixed income
department of Salomon Brothers, Inc. Mr. Holley holds a B.S. degree in
Engineering from University of Pennsylvania and an M.B.A. from the Wharton
School. Mr. Barth and Ms. Feder have had primary responsibility for managing the
Portfolio's assets since inception. Mr. Holley has shared primary responsibility
for managing the Portfolio's assets since August, 1993.
MUNICIPAL MONEY MARKET PORTFOLIO -- GERALD P. BARTH AND ABIGAIL JONES
FEDER. Information about Mr. Barth and Ms. Feder is included under Money Market
Bond Portfolio above. Mr. Barth and Ms. Feder have shared primary responsibility
for managing the Portfolio's assets since inception.
ADMINISTRATOR. The Adviser also provides the Fund with administrative
services pursuant to an Administration Agreement. The services provided under
the Administration Agreement are subject to the supervision of the Officers and
the Board of Directors of the Fund, and include day-to-day administration of
matters related to the corporate existence of the Fund, maintenance of its
records, preparation of reports, supervision of the Fund's arrangements with its
custodian, and assistance in the preparation of the Fund's registration
statements under Federal and State laws. The Administration Agreement also
provides that the Administrator through its agents will provide the Fund with
dividend disbursing and transfer agent services. For its services under the
Administration Agreement, the Fund pays the Adviser a monthly fee which on an
annual basis equals .15% of the average daily net assets of each Portfolio.
Under an agreement between the Adviser and The Chase Manhattan Bank, N.A.
("Chase"), Chase provides certain administrative services to the Fund. In a
merger completed on September 1, 1995, Chase succeeded to all of the rights and
obligations under the U.S. Trust Administration Agreement between the Adviser
and the United States Trust Company of New York ("U.S. Trust"), pursuant to
which U.S. Trust had agreed to provide certain administrative services to the
Fund. Pursuant to a delegation clause in the U.S. Trust Administration
Agreement, U.S. Trust delegated its administration responsibilities to Chase
Global Funds Services Company ("CGFSC"), formerly known as Mutual Funds Service
Company, which after the merger with Chase is a subsidiary of Chase and will
continue to provide certain administrative services to the Fund. The Adviser
supervises and monitors such administrative services provided by CGFSC. The
services provided under the
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Administration Agreement and the U.S. Trust Administration Agreement are also
subject to the supervision of the Board of Directors of the Fund. The Board of
Directors of the Fund has approved the provision of services described above
pursuant to the Administration Agreement and the U.S. Trust Administration
Agreement as being in the best interests of the Fund. CGFSC's business address
is 73 Tremont Street, Boston, Massachusetts 02108-3913. For additional
information regarding the Administration Agreement or the U.S. Trust
Administration Agreement, see "Management of the Fund" in the Statement of
Additional Information.
DIRECTORS AND OFFICERS. Pursuant to the Fund's Articles of Incorporation,
the Board of Directors decides upon matters of general policy and reviews the
actions of the Fund's Adviser, Administrator and Distributor. The Officers of
the Fund conduct and supervise its daily business operations.
DISTRIBUTOR. Morgan Stanley serves as the exclusive Distributor of the
shares of the Fund. Under its Distribution Agreement with the Fund, Morgan
Stanley sells shares of each Portfolio upon the terms and at the current
offering price described in this Prospectus. Morgan Stanley is not obligated to
sell any certain number of shares of any Portfolio.
The Portfolios currently offer only the classes of shares offered by this
Prospectus. The Portfolios may in the future offer one or more classes of shares
with features, distribution expenses or other expenses that are different from
those of the classes currently offered.
The Fund has adopted a Plan of Distribution with respect to the Class B
shares of each of the Non-Money Portfolios pursuant to Rule 12b-1 under the 1940
Act (each, a "Plan"). Under each Plan, the Distributor is entitled to receive
from each of the Non-Money Portfolios a distribution fee, which is accrued daily
and paid quarterly, of 0.25% of the Class B shares' average daily net assets on
an annualized basis. The Distributor expects to reallocate most of its fee to
its investment representatives. The Distributor may, in its discretion,
voluntarily waive from time to time all or any portion of its distribution fee
and each of the Distributor and the Adviser is free to make additional payments
out of its own assets to promote the sale of Fund shares, including payments
that compensate financial institutions for distribution services or shareholder
services.
The Plan is designed to compensate the Distributor for its services, not to
reimburse the Distributor for its expenses, and the Distributor may retain any
portion of the fee that it does not expend in fulfillment of its obligations to
the Fund.
EXPENSES. Each Portfolio is responsible for payment of certain other fees
and expenses (including legal fees, accountants' fees, custodial fees and
printing and mailing costs) specified in the Administration and Distribution
Agreements.
PURCHASE OF SHARES
Class A and Class B shares of the Non-Money Portfolios and Class A shares of
the Money Portfolios may be purchased, without sales commission, at the net
asset value per share next determined after receipt of the purchase order by the
Non-Money Portfolio and, in the case of the Money Portfolios, at the price next
determined after Federal Funds are available to the Money Portfolio. See
"Valuation of Shares."
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MINIMUM INVESTMENT AND ACCOUNT SIZES; CONVERSION FROM CLASS A TO CLASS B SHARES
For an account for a Non-Money Portfolio opened on or after January 2, 1996
(a "New Non-Money Account"), the minimum initial investment and minimum account
size are $500,000 for Class A shares and $100,000 for Class B shares. The
minimum initial investment for each Money Portfolio is $50,000. Managed Accounts
may purchase Class A shares without being subject to any minimum initial
investment or minimum account size requirements for a Portfolio account.
Officers of the Adviser and its affiliates are subject to the minimums for a
Portfolio account, except they may purchase Class B shares subject to a minimum
initial investment and minimum account size of $5,000 for a Portfolio account.
If the value of a New Non-Money Account containing Class A shares falls
below $500,000 (but remains at or above $100,000) because of shareholder
redemption(s), the Fund will notify the shareholder, and if the account value
remains below $500,000 (but remains at or above $100,000) for a continuous
60-day period, the Class A shares in such account will convert to Class B shares
and will be subject to the distribution fee and other features applicable to the
Class B shares. The Fund, however, will not convert Class A shares to Class B
shares based solely upon changes in the market that reduce the net asset value
of shares. Under current tax law, conversions between share classes are not a
taxable event to the shareholder.
Shares in a Portfolio account opened prior to January 2, 1996 were
designated Class A shares on January 2, 1996. Shares in a Non-Money Portfolio
account opened prior to January 2, 1996 (each, a "Pre 1996 Non-Money Account")
with a value of $100,000 or more on March 1, 1996 (a "Grandfathered Class A
Account") remain Class A shares regardless of account size thereafter. Except
for shares in a Managed Account, shares in a Pre-1996 Non-Money Account with a
value of less than $100,000 on March 1, 1996 (a "Grandfathered Class B Account")
convert to Class B shares on March 1, 1996. Grandfathered Class A Accounts and
Managed Accounts are not subject to conversion from Class A shares to Class B
shares.
Investors may also invest in the Fund by purchasing shares through a trust
department, broker, dealer, agent, financial planner, financial services firm or
investment adviser. An investor may be charged an additional service or
transaction fee by that institution. The minimum investment levels may be waived
at the discretion of the Adviser for (i) certain employees and customers of
Morgan Stanley or its affiliates and certain trust departments, brokers,
dealers, agents, financial planners, financial services firms, or investment
advisers that have entered into an agreement with Morgan Stanley or its
affiliates; and (ii) retirement and deferred compensation plans and trusts used
to fund such plans, including, but not limited to, those defined in Section
401(a), 403(b) or 457 of the Internal Revenue Code of 1986, as amended, and
"rabbi trusts". The Fund reserves the right to modify or terminate the
conversion features of the shares as stated above at any time upon 60-days'
notice to shareholders.
MINIMUM ACCOUNT SIZES AND INVOLUNTARY REDEMPTION OF SHARES
If the value of a New Non-Money Account falls below $100,000 because of
shareholder redemption(s), the Fund will notify the shareholder, and if the
account value remains below $100,000 for a continuous 60-day period, the shares
in such accounts are subject to redemption by the Fund and, if redeemed, the net
asset value of such shares will be promptly paid to the shareholder. The Fund,
however, will not redeem shares based solely upon changes in the market that
reduce the net asset value of shares.
For purposes of redemptions by the Fund, the foregoing minimum account size
requirements do not apply to New Non-Money Accounts containing Class B shares
held by officers of the Adviser or its affiliates. However,
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if the value of such account held by an officer of the Adviser or its affiliates
falls below $5,000 because of shareholder redemption(s), the Fund will notify
the shareholder, and if the account value remains below $5,000 for a continuous
60-day period, the shares in such account are subject to redemption by the Fund
and, if redeemed, the net asset value of such shares will be promptly paid to
the shareholder.
Grandfathered Class A Accounts, Grandfathered Class B Accounts and Managed
Accounts are not subject to involuntary redemption.
If a shareholder reduces its total investment in Class A shares of a Money
Portfolio to less than $10,000, the investment may be subject to redemption.
The Fund reserves the right to modify or terminate the involuntary
redemption features of the shares as stated above at any time upon 60 days'
notice to shareholders.
CONVERSION FROM CLASS B TO CLASS A SHARES
If the value of Class B shares in a Non-Money Portfolio account increases,
whether due to shareholder share purchases or market activity, to $500,000 or
more, the Class B shares will convert to Class A shares. Under current tax law,
such conversion is not a taxable event to the shareholder. Class A shares
converted from Class B shares are subject to the same minimum account size
requirements that are applicable to New Non-Money Accounts containing Class A
shares, as stated above. The Fund reserves the right to modify or terminate this
conversion feature at any time upon 60 days' notice to shareholders.
INITIAL PURCHASES DIRECTLY FROM THE FUND
The Fund's determination of an investor's eligibility to purchase shares of
a given class will take precedence over the investor's selection of a class.
Assuming the investor is eligible for the class, the Fund will select the most
favorable class for the investor, if the investor has not done so.
1) BY CHECK. An account may be opened by completing and signing an Account
Registration Form and mailing it, together with a check ($500,000 minimum for
Class A shares of each Non-Money Portfolio, $100,000 minimum for Class B
shares of each Non-Money Portfolio, and $50,000 minimum for each Money
Portfolio, with certain exceptions for Morgan Stanley employees and select
customers, including those who participate in the Automatic Purchase of
Portfolio Shares program described below) payable to "Morgan Stanley
Institutional Fund, Inc. -- [portfolio name]", to:
Morgan Stanley Institutional Fund, Inc.
P.O. Box 2798
Boston, Massachusetts 02208-2798
Payment will be accepted only in U.S. dollars, unless prior approval for
payment by other currencies is given by the Fund. The Portfolio(s) to be
purchased should be designated on the Account Registration Form. For purchases
by check, the Fund is ordinarily credited with Federal Funds within one
business day. Thus your purchase of shares by check is ordinarily credited to
your account at the net asset value per share of the relevant Portfolio
determined on the next business day after receipt.
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2) BY FEDERAL FUNDS WIRE. Purchases may be made by having your bank wire
Federal Funds to the Fund's bank account. In order to ensure prompt receipt
of your Federal Funds Wire, it is important that you follow these steps:
A. Telephone the Fund (toll free: 1-800-548-7786) and provide us with your
name, address, telephone number, Social Security or Tax Identification
Number, the portfolio(s) selected, the class selected, the amount being
wired, and by which bank. We will then provide you with a Fund account
number. (Investors with existing accounts should also notify the Fund prior
to wiring funds.)
B. Instruct your bank to wire the specified amount to the Fund's Wire
Concentration Bank Account (be sure to have your bank include the name of
the portfolio(s) selected, the class selected and the account number
assigned to you) as follows:
Chase Manhattan Bank, N.A.
One Manhattan Plaza
New York, NY 10081-1000
ABA#021000021
DDA#910-2-733293
Attn: Morgan Stanley Institutional Fund, Inc.
Ref: (Portfolio name, your account number, your account name)
Please call the Fund at 1-800-548-7786 prior to wiring funds.
C. Complete the Account Registration Form and mail it to the address shown
thereon.
Purchase orders for shares of the Portfolio which are received prior to the
regular close of the NYSE (currently 4:00 p.m. Eastern Time) will be executed
at the price computed on the date of receipt as long as the Transfer Agent
receives payment by check or in Federal Funds prior to the regular close of
the NYSE on such day.
Federal Funds purchase orders will be accepted only on a day on which the Fund
and Chase (the "Custodian Bank") are open for business. Share purchases of the
Money Market Portfolio in Federal Funds received by 12:00 noon (Eastern Time),
and share purchases of the Municipal Money Market Portfolio in Federal Funds
received by 11:00 a.m. (Eastern Time) will begin to earn income on the day of
receipt. Your bank may charge a service fee for wiring Federal Funds.
3) BY BANK WIRE. The same procedure outlined under "By Federal Funds Wire"
above must be followed in purchasing shares by bank wire. However, money
transferred by bank wire may or may not be converted into Federal Funds the
same day, depending on the time the money is received and the bank handling
the wire. Prior to such conversion, an investor's money will not be invested.
For the Money Market and Municipal Money Market Portfolios, if money is not
converted the same day, it will be converted the next business day and shares
will be purchased at the net asset value next determined after such
conversion. Your bank may charge a service fee for wiring funds.
4) AUTOMATIC PURCHASE OF PORTFOLIO SHARES. Free cash balances (i.e., any cash
that is available on demand at the close of the previous business day) which
are held in certain eligible accounts at Morgan Stanley Asset Management
Inc., Morgan Stanley or any other affiliated investment adviser or broker,
and which are
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selected at the discretion of the Adviser, will be automatically invested on
the next business day at net asset value in shares of the Money Market
Portfolio or the Municipal Money Market Portfolio. A shareholder may elect in
writing from time to time in which portfolio to invest. This automatic
purchase facility permits certain eligible investment management and
brokerage customers of Morgan Stanley to have their free cash balances
invested in portfolio shares on a daily basis pending other investments.
ADDITIONAL INVESTMENTS
You may add to your account at any time (minimum additional investment
$1,000 for each portfolio, except for automatic reinvestment of dividends and
capital gains distributions for which there are no minimums) by purchasing
shares at net asset value by mailing a check to the Fund (payable to "Morgan
Stanley Institutional Fund, Inc. -- [Portfolio name]") at the above address or
by wiring monies to the Custodian Bank as outlined above. It is very important
that your account name, portfolio name and the class selected be specified in
the letter or wire to assure proper crediting to your account. In order to
ensure that your wire orders are invested promptly, you are requested to notify
one of the Fund's representatives (toll-free 1-800-548-7786) prior to the wire
date. Additional investments will be applied to purchase additional shares in
the same class held by a shareholder in a Portfolio account.
OTHER PURCHASE INFORMATION
The purchase price of the Class A and Class B shares of each Non-Money
Portfolio is the net asset value next determined after the order is received.
See "Valuation of Shares." An order to purchase shares of the Fixed Income,
Municipal Bond, Mortgage-Backed Securities or High Yield Portfolios received
prior to the regular close of the New York Stock Exchange ("NYSE"), which is
currently 4:00 p.m. Eastern Time, will be executed at the price computed on the
date of receipt; an order received after the regular close of the NYSE will be
executed at the price computed the next day the NYSE is open as long as the
Transfer Agent receives payment by check or in Federal Funds prior to the
regular close of the NYSE on such day. Orders for the purchase of shares of the
Money Market Portfolio or Municipal Money Market Portfolio become effective on
the business day Federal Funds are received, and the purchase will be effected
at the net asset value next computed after receipt.
Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends. The net asset value of Class B shares will generally be
lower than the net asset value of Class A shares as a result of the distribution
expense charged to Class B shares. It is expected, however, that the net asset
value per share of the two classes will tend to converge immediately after the
recording of dividends which will differ by approximately the amount of the
distribution expense accrual differential between the classes.
In the interest of economy and convenience, and because of the operating
procedures of the Fund, certificates representing shares of the Portfolio(s)
will not be issued. All shares purchased are confirmed to you and credited to
your account on the Fund's books maintained by the Adviser or its agents. You
will have the same rights and ownership with respect to such shares as if
certificates had been issued.
To ensure that checks are collected by the Fund, withdrawals of investments
made by check are not presently permitted until payment for the purchase has
been received which may take up to eight business days after the date of
purchase. As a condition of this offering, if a purchase is cancelled due to
nonpayment or
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because your check does not clear, you will be responsible for any loss the Fund
or its agents incur. If you are already a shareholder, the Fund may redeem
shares from your account(s) to reimburse the Fund or its agents for any loss. In
addition, you may be prohibited or restricted from making future investments in
the Fund.
Investors may also invest in the Fund by purchasing shares through the
Distributor.
EXCESSIVE TRADING
Frequent trades involving either substantial portfolio assets or a
substantial portion of your account or accounts controlled by you can disrupt
management of a portfolio and raise its expenses. Consequently, in the interest
of all the stockholders of each Portfolio and each Portfolio's performance, the
Fund may in its discretion bar a stockholder that engages in excessive trading
of shares of any class of a portfolio from further purchases of shares of the
Fund for an indefinite period. The Fund considers excessive trading to be more
than one purchase and sale involving shares of the same class of a portfolio of
the Fund within any 120-day period. As an example, exchanging shares of
portfolios of the Fund as follows amounts to excessive trading: exchanging Class
A shares of Portfolio A for Class A shares of Portfolio B, then exchanging Class
A shares of Portfolio B for Class A shares of Portfolio C and again exchanging
Class A shares of Portfolio C for Class A shares of Portfolio B within a 120-day
period. Two types of transactions are exempt from these excessive trading
restrictions: (1) trades exclusively between money market portfolios; and (2)
trades done in connection with an asset allocation service, such as TFM
Accounts, managed or advised by MSAM and/or any of its affiliates.
REDEMPTION OF SHARES
You may withdraw all or any portion of the amount in your account by
redeeming shares at any time. Please note that purchases made by check are not
permitted to be redeemed until payment of the purchase has been collected, which
may take up to eight business days after purchase. The Fund will redeem Class A
and Class B shares of each Non-Money Portfolio and Class A shares of each Money
Portfolio at the next determined net asset value of shares of the applicable
class. On days that both the NYSE and the Custodian Bank are open for business,
the net asset value per share of the Fixed Income, Global Fixed Income,
Municipal Bond, Mortgage-Backed Securities and High Yield Portfolios is
determined at the regular close of trading of the NYSE (currently 4:00 p.m.
Eastern Time), and the net asset value per share of the Municipal Money Market
Portfolio is determined at 11:00 a.m. (Eastern Time) and the net asset value per
share of the Money Market Portfolio is determined at 12:00 p.m. (Eastern Time).
Shares of a Portfolio may be redeemed by mail or telephone. No charge is made
for redemption. Any redemption may be more or less than the purchase price of
your shares depending on, among other factors, the market value of the
investment securities held by the Portfolio.
BY MAIL
Each Non-Money Portfolio will redeem its Class A and Class B shares and each
Money Portfolio will redeem its Class A shares at the net asset value next
determined after your request is received if the request is received in "good
order." Your request should be addressed to Morgan Stanley Institutional Fund,
Inc., P.O. Box 2798, Boston, Massachusetts 02208-2798, except that deliveries by
overnight courier should be addressed to Morgan Stanley Institutional Fund,
Inc., c/o Chase Global Funds Services Company, 73 Tremont Street, Boston,
Massachusetts 02108-3913.
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"Good order" means that the request to redeem shares must include the
following documentation:
(a) A letter of instruction or a stock assignment specifying the class
and number of shares or dollar amount to be redeemed, signed by all
registered owners of the shares in the exact names in which they are
registered;
(b) Any required signature guarantees (see "Further Redemption
Information" below); and
(c) Other supporting legal documents, if required, in the case of
estates, trusts, guardianships, custodianships, corporations, pension and
profit-sharing plans and other organizations.
Shareholders who are uncertain of requirements for redemption should consult
with a Morgan Stanley Institutional Fund representative.
BY TELEPHONE
Provided you have previously elected the Telephone Redemption Option on the
Account Registration Form, you can request a redemption of your shares by
calling the Fund and requesting the redemption proceeds be mailed to you or
wired to your bank. Please contact one of Morgan Stanley Institutional Fund's
representatives for further details. In times of drastic market conditions, the
telephone redemption option may be difficult to implement. If you experience
difficulty in making a telephone redemption, your request may be made by mail or
overnight courier and will be implemented at the net asset value next determined
after it is received. Redemption requests sent to the Fund through overnight
courier must be sent to Morgan Stanley Institutional Fund, Inc., c/o Chase
Global Funds Services Company, 73 Tremont Street, Boston, Massachusetts
01208-3913. The Fund and the Fund's transfer agent (the "Transfer Agent") will
employ reasonable procedures to confirm that the instructions communicated by
telephone are genuine. These procedures include requiring the investor to
provide certain personal identification information at the time an account is
opened and prior to effecting each transaction requested by telephone. In
addition, all telephone transaction requests will be recorded and investors may
be required to provide additional telecopied written instructions regarding
transaction requests. Neither the Fund nor the Transfer Agent will be
responsible for any loss, liability, cost or expense for following instructions
received by telephone that either of them reasonably believes to be genuine.
To change the name of the commercial bank or account designated to receive
redemption proceeds, a written request must be sent to the Fund at the address
above. Requests to change the bank or account must be signed by each shareholder
and each signature must be guaranteed.
FURTHER REDEMPTION INFORMATION
Normally the Fund will make payment for all shares redeemed within one
business day of receipt of the request, but in no event will payment be made
more than seven days after receipt of a redemption request in good order.
However, payments to investors redeeming shares which were purchased by check
will not be made until payment for the purchase has been collected, which may
take up to 8 days after the date of purchase. The Fund may suspend the right of
redemption or postpone the date upon which redemptions are effected at times
when the NYSE is closed, or under any emergency circumstances as determined by
the Securities and Exchange Commission (the "Commission").
If the Board of Directors determines that it would be detrimental to the
best interests of the remaining shareholders of a Portfolio to make payment
wholly or partly in cash, the Fund may pay the redemption proceeds
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in whole or in part by a distribution-in-kind of securities held by a Portfolio
in lieu of cash in conformity with applicable rules of the Commission.
Distributions-in-kind will be made in readily marketable securities. Investors
may incur brokerage charges on the sale of Portfolio securities so received in
payment of redemptions.
To protect your account, the Fund and its agents from fraud, signature
guarantees are required for certain redemptions to verify the identity of the
person who has authorized a redemption from your account. Please contact the
Fund for further information. See "Redemption of Shares" in the Statement of
Additional Information.
SHAREHOLDER SERVICES
EXCHANGE FEATURES
You may exchange shares that you own in a Portfolio for shares of any other
available portfolio of the Fund (other than the International Equity Portfolio,
which is closed to new investors). In exchanging for shares of a portfolio with
more than one class, the class of shares you receive in the exchange will be
determined in the same manner as any other purchase of shares and will not be
based on the class of shares surrendered for the exchange. Consequently, the
same minimum initial investment and minimum account size for determining the
class of shares received in the exchange will apply. See "Purchase of Shares."
Shares of the portfolios may be exchanged by mail or telephone. The privilege to
exchange shares by telephone is automatic and made available without shareholder
election. Before you make an exchange, you should read the prospectus of the
portfolio(s) in which you seek to invest. Because an exchange transaction is
treated as a redemption followed by a purchase, an exchange would be considered
a taxable event for shareholders subject to tax. The exchange privilege is only
available with respect to portfolios that are registered for sale in a
shareholder's state of residence. The exchange privilege may be modified or
terminated by the Fund at any time upon 60 days' notice to shareholders.
BY MAIL
In order to exchange shares by mail, you should include in the exchange
request the name, class of shares and account number of your current Portfolio,
the names of the portfolio(s) and class(es) of shares into which you intend to
exchange shares, and the signatures of all registered account holders. Send the
exchange request to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798,
Boston, MA 02208-2798.
BY TELEPHONE
When exchanging shares by telephone, have ready the name, class of shares
and account number of the current portfolio, the name(s) of the portfolio(s) and
class(es) of shares into which you intend to exchange shares, your Social
Security number or Tax I.D. number, and your account address. Requests for
telephone exchanges received prior to 4:00 p.m. (Eastern Time) are processed at
the close of business that same day based on the net asset value of the class of
the portfolios involved in the exchange of shares at the close of business.
Requests received after 4:00 p.m. are processed the next business day based on
the net asset value determined at the close of such day. For additional
information regarding responsibility for the authenticity of telephoned
instructions, see "Redemption of Shares -- By Telephone" above.
TRANSFER OF REGISTRATION
You may transfer the registration of any of your Fund shares to another
person by writing to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798,
Boston, Massachusetts 02208-2798. As in the case of redemptions, the
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written request must be received in good order before any transfer can be made.
Transferring the registration of shares may affect the eligibility of your
account for a given class of the Portfolios' shares and may result in
involuntary conversion or redemption of your shares. See "Purchase of Shares"
above.
VALUATION OF SHARES
The net asset value per share of a class of shares of each Non-Money
Portfolio is determined by dividing the total market value of the Non-Money
Portfolio's investments and other assets attributable to such class, less all
liabilities attributable to such class, by the number of total outstanding
shares of such a class of the Non-Money Portfolio. Net asset value is calculated
separately for each class of the Portfolio. Net asset value per share of the
Non-Money Portfolios is determined as of the regular close of the NYSE on each
day that the NYSE is open for business. Securities listed on a U.S. securities
exchange for which market quotations are available are valued at the last quoted
sale price on the day the valuation is made. Price information on listed
securities is taken from the exchange where the security is primarily traded.
Securities listed on a foreign exchange are valued at their closing price.
Unlisted securities and listed securities not traded on the valuation date for
which market quotations are not readily available are valued at a price within a
range not exceeding the current asked price nor less than the current bid price.
The current bid and asked prices are determined either based on the bid and
asked prices quoted on such valuation date by two reputable brokers or as
provided by a reliable pricing service.
Bonds and other fixed income securities are valued according to the broadest
and most representative market, which will ordinarily be the over-the-counter
market. Net asset value includes interest on fixed income securities, which is
accrued daily unless collection is in doubt. In addition, bonds and other fixed
income securities may be valued on the basis of prices provided by a pricing
service when such prices are believed to reflect the fair market value of such
securities. The prices provided by a pricing service are determined without
regard to bid or last sale prices, but take into account institutional size
trading in similar groups of securities and any developments related to the
specific securities. Securities not priced in this manner are valued at the most
recently quoted bid price, or, when securities exchange valuations are used, at
the latest quoted sale price on the day of valuation. If there is no such
reported sale, the latest quoted bid price will be used. Debt securities
purchased with remaining maturities of 60 days or less are valued at amortized
cost, if it approximates market value. In the event that amortized cost does not
approximate market value, market prices as determined above will be used.
The value of other assets and securities for which no quotations are readily
available (including restricted and unlisted foreign securities) and those
securities for which it is inappropriate to determine prices in accordance with
the above-stated procedures are determined in good faith at fair value using
methods determined by the Board of Directors. For purposes of calculating net
asset value per share, all assets and liabilities initially expressed in foreign
currencies will be converted into U.S. dollars at the mean of the bid price and
asked price for such currencies against the U.S. dollar last quoted by any major
bank.
Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends for the class. Dividends will differ by approximately the
amount of the distribution expense accrual differential among the classes. The
net asset value of Class B shares will generally be lower than the net asset
value of Class A shares as a result of the distribution expense charged to Class
B shares.
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The net asset value per share of each of the Money Market and Municipal
Money Market Portfolios is determined by subtracting the Portfolio's liabilities
(including accrued expenses and dividends payable) from the total value of the
Portfolio's investments and other assets and dividing the result by the total
number of outstanding shares of the Portfolio. The net asset values per share of
the Municipal Money Market Portfolio and the Money Market Portfolio are
determined at 11:00 a.m. and 12:00 noon (Eastern Time), respectively, on the
days on which the NYSE is open. For the purpose of calculating each Portfolio's
net asset value per share, securities are valued by the "amortized cost" method
of valuation, which does not take into account unrealized gains or losses. This
involves valuing an instrument at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the instrument. While this
method provides certainty in valuation, it may result in periods during which
the value, as determined by amortized cost, is higher or lower than the price
the Portfolio would receive if it sold the instrument.
PERFORMANCE INFORMATION
The Fund may from time to time advertise total return for each class of the
Fixed Income, Global Fixed Income, Municipal Bond, Mortgage-Backed Securities
and High Yield Portfolios. In addition, from time to time the Fund may advertise
"yield" for the Global Fixed Income, Municipal Bond, High Yield, Money Market
and Municipal Money Market Portfolios and "effective yield" for the Money Market
and Municipal Money Market Portfolios. In addition to these yield figures, the
Municipal Bond and Municipal Money Market Portfolio may advertise a tax
equivalent yield. THESE FIGURES ARE BASED ON HISTORICAL PERFORMANCE AND ARE NOT
INTENDED TO INDICATE FUTURE PERFORMANCE. The "total return" shows what an
investment in a class of the Portfolio would have earned over a specified period
of time (such as one, five or ten years) assuming that all distributions and
dividends by the Portfolio were reinvested in the same class on the reinvestment
dates during the period. Total return does not take into account any federal or
state income taxes that may be payable on dividends and distributions or upon
redemption. The "yield" of the Global Fixed Income, Municipal Bond and High
Yield Portfolios refers to the income generated by an investment in the
Portfolio over a one-month or 30-day period, while the "yield" of the Money
Market and Municipal Money Market Portfolios refers to the income generated by
an investment in the Portfolio over a seven-day period (which period will be
stated in the advertisement). This income is then "annualized." That is, the
amount of income generated by the investment during that 30- or seven-day period
is assumed to be generated each 30-day period for twelve periods or each week
over a 52-week period, and is shown as a percentage of the investment. The
"effective yield" is calculated similarly but, when annualized, the income
earned on an investment in the Portfolio is assumed to be reinvested. The
"effective yield" will be slightly higher than the "yield" because of the
compounding effect of this assumed reinvestment. A "tax equivalent yield" is the
"yield" of the Portfolio increased by an amount based on an assumed rate of tax
for a shareholder. For further information concerning these figures, see
"Calculation of Yield and Total Return" in the Statement of Additional
Information. The Fund may also use comparative performance information in
marketing the Portfolios' shares, including data from Lipper Analytical
Services, Inc., Donoghue's Money Fund Report, other industry publications,
business periodicals, rating services and market indices.
The performance figures for Class B shares will generally be lower than
those for Class A shares because of the distribution fee charged to Class B
shares.
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DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
FIXED INCOME, GLOBAL FIXED INCOME, MUNICIPAL BOND, MORTGAGE-BACKED SECURITIES
AND HIGH YIELD PORTFOLIOS
All income dividends and capital gains distributions for a class of shares
of each Non-Money Portfolio will automatically be reinvested in additional
shares of such class at net asset value, except that, upon written notice to the
Fund or by checking off the appropriate box in the Distribution Option Section
on the Account Registration Form, a shareholder may elect to receive income
dividends and capital gains distributions in cash.
Each Non-Money Portfolio, except the Global Fixed Income Portfolio, expects
to distribute substantially all of its net investment income in the form of
monthly dividends and the Global Fixed Income Portfolio expects to distribute
substantially all of its net investment income in the form of quarterly
dividends. Net realized gains of each Non-Money Portfolio, if any, after
reduction for any tax loss carryforwards will also be distributed annually.
Confirmations of the purchases of shares of the Non-Money Portfolios through the
automatic reinvestment of income dividends and capital gains distributions will
be provided, pursuant to Rule 10b-10(b) under the Securities Exchange Act of
1934, as amended, on the next monthly client statement following such purchases
of shares. Consequently, confirmations of such purchases will not be provided at
the time of completion of such purchases as might otherwise be required by Rule
10b-10.
Undistributed net investment income is included in each Non-Money
Portfolio's net assets for the purpose of calculating net asset value per share.
Therefore, on the "ex-dividend" date, the net asset value per share excludes the
dividend (I.E., is reduced by the per share amount of the dividend). Dividends
paid shortly after the purchase of shares by an investor, although in effect a
return of capital, are taxable to shareholders.
Because of the distribution fee and any other expenses that may be
attributable to the Class B shares, the net income attributable to and the
dividends payable on Class B shares will be lower than the net income
attributable to and the dividends payable on Class A shares. As a result, the
net asset value per share of the classes of each Non-Money Portfolio will differ
at times. Expenses of each Non-Money Portfolio allocated to a particular class
of shares thereof will be borne on a pro rata basis by each outstanding share of
that class.
MONEY MARKET AND MUNICIPAL MONEY MARKET PORTFOLIOS
Net investment income is computed and dividends declared as of 1:00 p.m.
(Eastern time), on each day. Such dividends are payable to Municipal Money
Market Portfolio shareholders of record as of 11:00 a.m. (Eastern time) on that
day and to Money Market Portfolio shareholders of record as of 12:00 noon
(Eastern time) on that day, if the Fund and Custodian Bank are open for
business. This means that shareholders whose purchase orders become effective as
of 12:00 noon (for the Money Market Portfolio) or 11:00 a.m. (for the Municipal
Money Market Portfolio) receive the dividend for that day. Dividends declared
for Saturdays, Sundays and holidays are payable to shareholders of record as of
4:00 p.m. on the last preceding day the Fund and its Custodian Bank were open
for business.
For the purpose of calculating dividends, net income of each Money Portfolio
shall consist of interest earned, including any discount or premium ratably
amortized to the date of maturity, minus estimated expenses of the Money
Portfolio.
Each Money Portfolio's daily dividends are accrued throughout the month and
are distributed on the fifteenth calendar day of each month (or next business
day if the fifteenth calendar day falls on a holiday or
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weekend). Dividends of each Money Portfolio are payable in additional shares,
except that, upon written notice to the Fund or by checking off the appropriate
box in the Distribution Option Section on the Account Registration Form, a
shareholder may elect to receive income dividends and any capital gains
distributions in cash.
Each shareholder receives a monthly statement summarizing activity in the
account. If at any time a shareholder wishes to withdraw all of the funds in an
account, the proceeds will be sent to the shareholder by wire or check,
according to the shareholder's instructions. If the withdrawal is by wire, a
check in the amount of the income to the shareholder's account through the day
of withdrawal will be mailed to the shareholder on the next business day.
Withdrawals by check will include accrued income through the date of withdrawal.
Net realized short-term capital gains, if any, of each Money Portfolio are
to be distributed whenever the Board of Directors determine that such
distributions would be in the best interest of shareholders, but in any event,
at least once a year. The Money Portfolios do not expect to realize any
long-term capital gains. Should any such gains be realized, they will be
distributed annually.
It is an objective of management to maintain the price per share of each
Money Portfolio as computed for the purpose of sales and redemptions at exactly
$1.00. In the event the Board of Directors determine that a deviation from the
$1.00 per share price may exist which may result in a material dilution or other
unfair results to investors or existing shareholders, they will take corrective
action they regard as necessary and appropriate, including the sale of
instruments from a Money Portfolio prior to maturity to realize capital gains or
losses; shortening average portfolio maturity; withholding dividends; making a
special capital distribution; or redemptions of shares in kind.
TAXES
GENERAL
The following summary of certain federal income tax consequences is based on
current tax laws and regulations, which may be changed by legislative, judicial,
or administrative action.
No attempt has been made to present a detailed explanation of the federal,
state, or local income tax treatment of a Portfolio or its shareholders.
Accordingly, shareholders are urged to consult their tax advisors regarding
specific questions as to federal, state and local income taxes.
Each Portfolio is treated as a separate entity for federal income tax
purposes and is not combined with the Fund's other Portfolios. Each Portfolio
intends to qualify for the special tax treatment afforded regulated investment
companies under Subchapter M of the Code, so that the Portfolio will be relieved
of federal income tax on that part of its net investment income and net capital
gain that is distributed to shareholders.
Each Portfolio distributes substantially all of its net investment income
(including, for this purpose, net short-term capital gain) to shareholders.
Dividends from a Portfolio's net investment income (other than "exempt-interest
dividends," described below) are taxable to shareholders as ordinary income,
whether received in cash or in additional shares. Such dividends paid by a
Portfolio will generally not qualify for the 70% dividends-received deduction
for corporate shareholders. Each Portfolio will report annually to its
shareholders the amount of dividend income qualifying for such treatment.
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Distributions of net capital gain (the excess of net long-term capital gain
over net short-term capital loss) are taxable to shareholders as long-term
capital gain, regardless of how long shareholders have held their shares.
[Distributions of net investment income and net capital gain are not eligible
for the corporate dividends-received deduction.] Each Portfolio sends reports
annually to its shareholders of the federal income tax status of all
distributions made during the preceding year.
Each Portfolio intends to make sufficient distributions or deemed
distributions of its ordinary income and capital gain net income (the excess of
short-term and long-term capital gains over short-term and long-term capital
losses) including any available capital loss carryforwards, prior to the end of
each calendar year to avoid liability for federal excise tax.
Dividends and other distributions declared by a Portfolio in October,
November or December of any year and payable to shareholders of record on a date
in such month will be deemed to have been paid by the Portfolio and received by
the shareholders on December 31 of that year if the distributions are paid by
the Portfolio at any time during the following January.
The sale, exchange or redemption of shares may result in taxable gain or
loss to the selling, exchanging or redeeming shareholder, depending upon whether
the fair market value of the redemption proceeds exceeds or is less than the
Shareholder's adjusted basis in the redeemed, exchanged or sold shares. If
capital gain distributions have been made with respect to shares that are sold
at a loss after being held for six months or less, then the loss is treated as a
long-term capital loss to the extent of the capital gain distributions.
The conversion of Class A shares to Class B shares should not be a taxable
event to the shareholder.
Shareholders are urged to consult with their tax advisors concerning the
application of state and local income taxes to investments in a Portfolio, which
may differ from the federal income tax consequences described above.
THE MUNICIPAL BOND AND MUNICIPAL MONEY MARKET PORTFOLIOS
The dividends payable by the Municipal Bond and the Municipal Money Market
Portfolios from net tax-exempt interest from municipal bonds and notes will
qualify as "exempt-interest dividends" if, at the close of each quarter of its
taxable year, at least 50% of the value of its total assets consists of
securities the interest on which is excludable from gross income. Each of the
Municipal Bond and Municipal Money Market Portfolios intends to invest a
sufficient portion of its assets in municipal bonds and notes to qualify to pay
"exempt-interest dividends."
Exempt-interest dividends are excludable from a shareholder's gross income
for regular income tax purposes. However, the receipt of such dividends may have
collateral federal income tax consequences, including alternative minimum tax
consequences. In addition, the receipt of exempt-interest dividends may cause
persons receiving Social Security or Railroad Retirement benefits to be taxable
on a portion of such benefits. See the Statement of Additional Information.
Current federal tax law limits the types of volume of bonds qualifying for the
federal income tax exemption of interest, which may have an effect on the
ability of the Portfolios to purchase sufficient amounts of tax-exempt
securities to satisfy the Code's requirement for the payment of exempt-interest
dividends.
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All or a portion of the interest on indebtedness incurred or continued by an
investor to purchase or carry shares is not deductible for federal income tax
purposes. Furthermore, entities or persons who are "substantial users" (or
persons related to "substantial users") of facilities financed by "private
activity bonds" or "industrial development bonds" should consult their tax
advisors before purchasing shares of the Portfolios. See the Statement of
Additional Information.
The Portfolios will report annually to their shareholders the portion of
dividends that is taxable and the portion that is tax-exempt based on income
received by the Portfolios during the year to which the dividends relate.
The exemption of dividends paid by the Municipal Bond and Municipal Money
Market Portfolio for Federal income tax purposes may not result in similar
exemptions under the laws of a particular state or local taxing authority. Each
of the Municipal Bond and Municipal Money Market Portfolio will report annually
to its shareholders the percentage and source, on a state-by-state basis, of
interest income earned on municipal bonds and municipal notes held by the
Portfolio during the preceding year.
THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED HEREIN FOR GENERAL
INFORMATION ONLY. PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS
WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN A PORTFOLIO.
PORTFOLIO TRANSACTIONS
The Investment Advisory Agreement authorizes the Adviser to select the
brokers or dealers that will execute the purchases and sales of investment
securities for the Portfolios and directs the Adviser to use its best efforts to
obtain the best available price and most favorable execution with respect to all
transactions for the Portfolios. The Fund has authorized the Adviser to pay
higher commissions in recognition of brokerage services which, in the opinion of
the Adviser, are necessary for the achievement of better execution, provided the
Adviser believes this to be in the best interest of the Fund.
Since shares of the Portfolios are not marketed through intermediary brokers
or dealers, it is not the Fund's practice to allocate brokerage or principal
business on the basis of sales of shares which may be made through such firms.
However, the Adviser may place portfolio orders with qualified broker-dealers
who recommend the Fund's portfolios or who act as agents in the purchase of
shares of the Fund's portfolios for their clients.
In purchasing and selling securities for the Portfolios, it is the Fund's
policy to seek to obtain quality execution at the most favorable prices, through
responsible broker-dealers. In selecting broker-dealers to execute the
securities transactions for the Portfolios, consideration will be given to such
factors as the price of the security, the rate of the commission, the size and
difficulty of the order, the reliability, integrity, financial condition,
general execution and operational capabilities of competing broker-dealers, and
the brokerage and research services which they provide to the Fund. Some
securities considered for investment by the Portfolios may also be appropriate
for other clients served by the Adviser. If purchase or sale of securities
consistent with the investment policies of a Portfolio and one or more of these
other clients served by the Adviser is considered at or about the same time,
transactions in such securities will be allocated among the Portfolio and
clients in a
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manner deemed fair and reasonable by the Adviser. Although there is no specified
formula for allocating such transactions, the various allocation methods used by
the Adviser, and the results of such allocations, are subject to periodic review
by the Fund's Directors.
Subject to the overriding objective of obtaining the best possible execution
of orders, the Adviser may allocate a portion of the Fund's portfolio brokerage
transactions to Morgan Stanley or broker affiliates of Morgan Stanley. In order
for Morgan Stanley or its affiliates to effect any portfolio transactions for
the Fund, the commissions, fees or other remuneration received by Morgan Stanley
or such affiliates must be reasonable and fair compared to the commissions, fees
or other remuneration paid to other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time. Furthermore, the Board
of Directors of the Fund, including a majority of the Board of Directors who are
not "interested persons," as defined in the 1940 Act have adopted procedures
which are reasonably designed to provide that any commissions, fees or other
remuneration paid to Morgan Stanley or such affiliates are consistent with the
foregoing standard.
Portfolio securities will not be purchased from or through, or sold to or
through, the Adviser or Morgan Stanley or any "affiliated persons," as defined
in the 1940 Act, of Morgan Stanley when such entities are acting as principals,
except to the extent permitted by law.
Although none of the Portfolios will invest for short-term trading purposes,
investment securities may be sold from time to time without regard to the length
of time they have been held. For each Portfolio, it is anticipated that, under
normal circumstances, the annual portfolio turnover rate will not exceed 100%.
High portfolio turnover involves correspondingly greater transaction costs which
will be borne directly by the respective Portfolio. In addition, high portfolio
turnover may result in more capital gains which would be taxable to the
shareholders of the respective Portfolio. The tables set forth in "Financial
Highlights" present the Portfolios' historical turnover rates.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
The Fund was organized as a Maryland corporation on June 16, 1988. The
Articles of Incorporation, as amended and restated, permit the Fund to issue up
to 34 billion shares of common stock, with $.001 par value per share. Pursuant
to the Fund's Articles of Incorporation, the Board of Directors may increase the
number of shares the Fund is authorized to issue without the approval of the
shareholders of the Fund. Subject to the notice period to shareholders with
respect to shares held by shareholders, the Board of Directors has the power to
designate one or more classes of shares of common stock and to classify and
reclassify any unissued shares with respect to such classes. The shares of
common stock of each portfolio are currently classified into two classes, the
Class A shares and Class B shares, except for the International Small Cap, Money
Market and Municipal Money Market Portfolio, which only offer Class A shares.
The shares of each Portfolio, when issued, will be fully paid,
nonassessable, fully transferable and redeemable at the option of the holder.
The shares have no preference as to conversion, exchange, dividends, retirement
or other features and have no pre emptive rights. The shares of each Portfolio
have non-cumulative voting rights, which means that the holders of more than 50%
of the shares voting for the election of Directors can elect 100% of the
Directors if they choose to do so. Persons or organizations owning 25% or more
of the outstanding shares
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of a Portfolio may be presumed to "control" (as that term is defined in the 1940
Act) that Portfolio. Under Maryland law, the Fund is not required to hold an
annual meeting of its shareholders unless required to do so under the 1940 Act.
REPORTS TO SHAREHOLDERS
The Fund will send to its shareholders annual and semi-annual reports; the
financial statements appearing in annual reports are audited by independent
accountants. Monthly unaudited portfolio data is also available from the Fund
upon request.
In addition, the Adviser, or its agent, as Transfer Agent, will send to each
shareholder having an account directly with the Fund a monthly statement showing
transactions in the account, the total number of shares owned, and any dividends
or distributions paid.
CUSTODIAN
As of September 1, 1995, domestic securities and cash are held by Chase,
which replaced U.S. Trust as the Fund's domestic custodian. Chase is not an
affiliate of the Adviser or the Distributor. Morgan Stanley Trust Company,
Brooklyn, New York ("MSTC"), an affiliate of the Adviser and the Distributor,
acts as the Fund's custodian for foreign assets held outside the United States
and employs subcustodians approved by the Board of Directors of the Fund in
accordance with regulations of the Securities and Exchange Commission for the
purpose of providing custodial services for such assets. MSTC may also hold
certain domestic assets for the Fund. For more information on the custodians,
see "General Information -- Custody Arrangements" in the Statement of Additional
Information.
DIVIDEND DISBURSING AND TRANSFER AGENT
Chase Global Funds Services Company, 73 Tremont Street, Boston,
Massachusetts 02108-3913, acts as Dividend Disbursing and Transfer Agent for the
Fund.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP serves as independent accountants for the Fund and
audits its annual financial statements.
LITIGATION
The Fund is not involved in any litigation.
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APPENDIX A
DESCRIPTION OF CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE CORPORATE BOND RATINGS:
Aaa -- Bonds which are rated Aaa are judged to be the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt-edge." Interest payments are protected by a large or by an exceptionally
stable margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
Moody's applies numerical modifiers 1, 2 and 3 in the Aa and A rating
categories. The modifier 1 indicates that the security ranks at a higher end of
the rating category, modifier 2 indicates a mid-range rating and the modifier 3
indicates that the issue ranks at the lower end of the rating category.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
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STANDARD & POOR'S RATINGS GROUP CORPORATE BOND RATINGS:
AAA -- Bonds rated AAA have the highest rating assigned by Standard & Poor's
to a debt obligation and indicate an extremely strong capacity to pay principal
and interest.
AA -- Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only to a small degree.
A -- Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for debt in higher rated categories.
BB, B, CCC, CC -- Debt rated BB, B, CCC and CC is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
C -- The rating C is reserved for income bonds on which no interest is being
paid.
D -- Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.
50
<PAGE>
<TABLE>
<CAPTION>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
FIXED INCOME, GLOBAL FIXED INCOME, MORTGAGE-BACKED SECURITIES,
MUNICIPAL BOND, HIGH YIELD, MONEY MARKET AND MUNICIPAL MONEY MARKET
PORTFOLIOS
P.O. BOX 2798, BOSTON, MA 02208-2798
- ---------------------------------------------------------------------------------------------------------------
NOTE: THIS REGISTRATION FORM SHOULD BE COMPLETED BY THOSE INVESTORS WITH
EXISTING MORGAN STANLEY ACCOUNTS DESIRING TO INVEST FREE CASH BALANCES
AUTOMATICALLY.
- ---------------------------------------------------------------------------------------------------------------
ACCOUNT REGISTRATION FORM
- ---------------------------------------------------------------------------------------------------------------
<S> <C>
ACCOUNT INFORMATION If you need assistance in filling out this form
Fill in where applicable for the Morgan Stanley Institutional Fund, please
contact your Morgan Stanley representative or call
us toll free 1-(800)-548-7786. Please print all
items except signature, and mail to the Fund at the
address above.
- ---------------------------------------------------------------------------------------------------------------
A) REGISTRATION
1. INDIVIDUAL 1. / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
First Name Initial Last Name
2. JOINT TENANTS 2. / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
(RIGHTS OF First Name Initial Last Name
SURVIVORSHIP / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
PRESUMED UNLESS First Name Initial Last Name
TENANCY IN COMMON
IS INDICATED)
- ---------------------------------------------------------------------------------------------------------------
3. CORPORATIONS, 3. / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
TRUSTS AND OTHERS
Please call the / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
Fund for additional
documents that may / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
be required to set
up account and to
authorize transactions.
Type of / / INCORPORATED / / UNINCORPORATED / / PARTNERSHIP / / UNIFORM GIFT/TRANSFER TO MINOR
Registration: ASSOCIATION (ONLY ONE CUSTODIAN AND MINOR PERMITTED)
/ / TRUST __________________________________ / / OTHER (Specify) ____________________________
- ---------------------------------------------------------------------------------------------------------------
B) MAILING ADDRESS Street or P.O. Box / / / / / / / / / / / / / / / / / / / / / / / / / / / /
Please fill in
completely, including City / / / / / / / / / / / / / State / / / Zip / / / / / /-/ / / / /
telephone number(s).
Home Business
Telephone No./ / / /-/ / / /-/ / / / / Telephone No./ / / /-/ / / /-/ / / /
/ / United States / / Resident / /Non-Resident Alien:
Citizen Alien Indicate Country of Residence _________
- ---------------------------------------------------------------------------------------------------------------
C) TAXPAYER PART 1. Enter your Taxpayer IMPORTANT TAX INFORMATION
IDENTIFICATION Identification Number. For most You (as a payee) are required by
NUMBER individual taxpayers, this is your law to provide us (as payer) with
If the account is in Social Security Number. your correct taxpayer identification
more than one name, TAXPAYER IDENTIFICATION NUMBER number. Accounts that have a missing
CIRCLE THE NAME OF THE / / / /-/ / / / / / / / / or incorrect taxpayer identification
PERSON WHOSE TAXPAYER OR number will be subject to backup
IDENTIFICATION NUMBER SOCIAL SECURITY NUMBER withholding at a 31% rate on interest,
IS PROVIDED IN SECTION / / / /-/ / /-/ / / / / dividends, distributions and other
A) ABOVE. If no name PART 2. BACKUP WITHHOLDING payments. If you have not provided us with
is circled, the number / / Check this box if you are your correct taxpayer identification
will be considered to be NOT subject to Backup number, you may be subject to
that of the last name Withholding under the a $50 penalty imposed by the Internal
listed. For Custodian provisions of Section Revenue Service.
account of a minor 3406(a)(1)(C) of the Internal Backup withholding is not an
(Uniform Gifts/Transfers Revenue Code. additional tax; the tax liability of
to Minor Acts), give the persons subject to backup withholding
Social Security Number will be reduced by the amount of tax
of the minor. withheld. If withholding results in
an overpayment of taxes, a refund
may be obtained.
You may be notified
that you are subject to backup
withholding under section 3406(a)(1)(C)
of the Internal Revenue Code because you
have underreported interest or dividends
or you were required to but failed to
file a return which would have included a
reportable interest or dividend payment. IF
YOU HAVE NOT BEEN SO NOTIFIED, CHECK THE
BOX IN PART 2 AT LEFT.
- ---------------------------------------------------------------------------------------------------------------
D) PORTFOLIO AND For Purchase of the following Portfolio(s):
CLASS SELECTION Fixed Income Portfolio / / Class A Shares $____ / / Class B Shares $____
(Class A shares Global Fixed Income Portfolio / / Class A Shares $____ / / Class B Shares $____
minimum $500,000 Mortgage-Backed Securities Portfolio / / Class A Shares $____ / / Class B Shares $____
for each Portfolio Municipal Bond Portfolio / / Class A Shares $____ / / Class B Shares $____
and Class B shares High Yield Portfolio / / Class A Shares $____ / / Class B Shares $____
minimum $100,000 for Money Market Portfolio / / Class A Shares $____
each of the Fixed Municipal Money Market Portfolio / / Class A Shares $____
Income, Global Fixed
Income, Municipal Bond, Total Initial Investment $_____________
Mortgage-Backed
Securities and High
Yield Portfolios.
Minimum $50,000 for
each of the Money
Market and Municipal
Money Market Portfolios.)
Please indicate
Portfolio, class and
amount.
- ---------------------------------------------------------------------------------------------------------------
E) METHOD OF Payment by:
INVESTMENT / / Check (MAKE CHECK PAYABLE TO MORGAN STANLEY INSTITUTIONAL FUND, INC.--PORTFOLIO NAME)
Please
indicate
portfolio, / / Exchange $_______________________ From ______________________________ / / / / / / / / / / /-/ /
manner of Name of Portfolio Account No.
payment.
/ / Account previously established by:
/ / Phone exchange / / Wire on ________________________________ / / / / / / / / / / / /-/ /
Date Account No. (Check
(Previously assigned by the Fund) Digit)
<PAGE>
- ---------------------------------------------------------------------------------------------------------------
F) AUTHORIZATION OF AUTOMATIC I/we hereby authorize the Fund and Morgan Stanley Asset
PURCHASE AND REDEMPTION Management Inc. to transfer from my/our account at Morgan
(Available only for Money Stanley & Co. Inc. all free cash balances (that is, any cash
Market and Municipal Money available on demand at the close of the previous day), which
Market Portfolios) are held in such account and to invest such cash balances in
the / / Money Market Portfolio or the / / Municipal Money Market
Portfolio (check only one).
____________-________________________________ / / / / / / / / / / / - / /
Account Title at Morgan Stanley & Co. Inc. Account Number
Account Number
- ---------------------------------------------------------------------------------------------------------------
G) DISTRIBUTION Income dividends and capital gains distributions (if any) will
OPTION be reinvested in additional shares unless either box below is
checked.
/ / Income dividends to be paid in cash, capital
gains distributions (if any) in shares.
/ / Income dividends and capital gains distributions
(if any) to be paid in cash.
- ---------------------------------------------------------------------------------------------------------------
H) TELEPHONE / / I/we hereby authorize the Fund and its ______________________ ________________
REDEMPTION agents to honor any telephone requests Name of COMMERCIAL Bank Bank Account No.
Please select at time of to wire redemption proceeds to the (Not Savings Bank)
initial application if you commercial bank indicated at right and/or
wish to redeem shares by mail redemption proceeds to the name and ________________
telephone. A SIGNATURE address in which my/our fund account is Bank ABA No.
GUARANTEE IS REQUIRED IF registered if such requests are believed
BANK ACCOUNT IS NOT to be authentic. _________________________________________________
REGISTERED IDENTICALLY TO TELEPHONE REQUESTS FOR REDEMPTIONS OR EXCHANGES Name(s) in which your BANK Account is Established
YOUR FUND ACCOUNT. WILL NOT BE HONORED UNLESS THE BOX IS CHECKED.
THE FUND AND THE FUND'S TRANSFER AGENT WILL
TELEPHONE REQUESTS FOR EMPLOY REASONABLE PROCEDURES TO CONFIRM THAT _________________________________________________
REDEMPTIONS OR EXCHANGES INSTRUCTIONS COMMUNICATED BY TELEPHONE ARE Bank's Street Address
WILL NOT BE HONORED GENUINE. THESE PROCEDURES INCLUDE REQUIRING
UNLESS THE BOX AT RIGHT THE INVESTOR TO PROVIDE CERTAIN PERSONAL
IS CHECKED. IDENTIFICATION INFORMATION AT THE TIME AN _________________________________________________
ACCOUNT IS OPENED AND PRIOR TO EFFECTING EACH City State Zip
TRANSACTION REQUESTED BY TELEPHONE. IN ADDITION,
ALL TELEPHONE TRANSACTION REQUESTS WILL BE RECORDED
AND INVESTORS MAY BE REQUIRED TO PROVIDE ADDITIONAL
TELECOPIED WRITTEN INSTRUCTIONS OF TRANSACTION
REQUESTS. NEITHER THE FUND NOR THE TRANSFER AGENT WILL
BE RESPONSIBLE FOR ANY LOSS, LIABILITY, COST OR EXPENSE
FOR FOLLOWING INSTRUCTIONS RECEIVED BY TELEPHONE THAT
IT REASONABLY BELIEVES TO BE GENUINE.
- ---------------------------------------------------------------------------------------------------------------
I) INTERESTED PARTY
OPTION
In addition to the account _________________________________________________________________
statement sent to my/our Name
registered address, I/we _________________________________________________________________
hereby authorize the fund
to mail duplicate _________________________________________________________________
statements to the name and Address
address provided at right.
_________________________________________________________________
City State Zip Code
- ---------------------------------------------------------------------------------------------------------------
J) DEALER
INFORMATION _______________________ _______________________________ ___________
Representative Name Representative No. Branch No.
- ---------------------------------------------------------------------------------------------------------------
K) SIGNATURE OF The undersigned certify(ies) that I/we have full authority and legal
ALL HOLDERS capacity to purchase and redeem shares of the Fund and affirm that I/we
AND TAXPAYER have received a current Prospectus of the Morgan Stanley Institutional
CERTIFICATION Fund, Inc. and agree to be bound by its terms. UNDER THE PENALTIES OF
Sign Here > PERJURY, I/WE CERTIFY THAT THE INFORMATION PROVIDED IN SECTION C)
ABOVE IS TRUE, CORRECT AND COMPLETE.
(X) (X)
__________________________________ ______________________________________
Signature Date Signature Date
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND OR THE DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER BY THE FUND OR THE DISTRIBUTOR TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION.
--------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
PAGE
----
Fund Expenses..................................... 2
Financial Highlights.............................. 5
Prospectus Summary................................ 12
Investment Objectives and Policies................ 16
Additional Investment Information................. 26
Investment Limitations............................ 29
Management of the Fund............................ 30
Purchase of Shares................................ 33
Redemption of Shares.............................. 38
Shareholder Services.............................. 40
Valuation of Shares............................... 41
Performance Information........................... 42
Dividends and Capital Gains Distributions......... 43
Taxes............................................. 44
Portfolio Transactions............................ 46
General Information............................... 47
Appendix A........................................ 49
Account Registration Form
</TABLE>
FIXED INCOME PORTFOLIO
GLOBAL FIXED INCOME PORTFOLIO
MUNICIPAL BOND PORTFOLIO
MORTGAGE-BACKED SECURITIES PORTFOLIO
HIGH YIELD PORTFOLIO
MONEY MARKET PORTFOLIO
MUNICIPAL MONEY MARKET PORTFOLIO
PORTFOLIOS OF THE
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
Common Stock
($.001 PAR VALUE)
-------------
PROSPECTUS
-------------
Investment Adviser
Morgan Stanley
Asset Management Inc.
Distributor
Morgan Stanley & Co.
Incorporated
MORGAN STANLEY INSTITUTIONAL FUND, INC.
P.O. Box 2798, Boston, MA 02208-2798
- ---------------------------------
- ---------------------------------
- ---------------------------------
- ---------------------------------
<PAGE>
- --------------------------------------------------------------------------------
P R O S P E C T U S
----------------------------------------------------------------------
SMALL CAP VALUE EQUITY PORTFOLIO
VALUE EQUITY PORTFOLIO
BALANCED PORTFOLIO
PORTFOLIOS OF THE
MORGAN STANLEY INSTITUTIONAL FUND, INC.
P.O. BOX 2798, BOSTON, MASSACHUSETTS 02208-2798
FOR INFORMATION CALL 1-800-548-7786
----------------
Morgan Stanley Institutional Fund, Inc. (the "Fund") is a no-load, open-end
management investment company, or mutual fund, which offers redeemable shares in
a series of diversified and non-diversified investment portfolios
("portfolios"). The Fund currently consists of twenty-eight portfolios
representing a broad range of investment choices. The Fund is designed to
provide clients with attractive alternatives for meeting their investment needs.
This prospectus (the "Prospectus") pertains to the Class A and the Class B
shares of the Small Cap Value Equity Portfolio, the Value Equity Portfolio and
the Balanced Portfolio (the "Portfolios"). On January 2, 1996, the Portfolios
began offering two classes of shares, the Class A shares and the Class B shares,
except for the Money Market, Municipal Money Market and International Small Cap
Portfolios which only offer Class A shares. All shares of the Portfolios owned
prior to January 2, 1996 were redesignated Class A shares on January 2, 1996.
The Class A and Class B shares currently offered by the Portfolios have
different minimum investment requirements and fund expenses. Shares of the
portfolios are offered with no sales charge or exchange or redemption fee (with
the exception of the International Small Cap Portfolio).
The SMALL CAP VALUE EQUITY PORTFOLIO seeks high long-term total return by
investing in undervalued equity securities of small- to medium-sized
corporations.
The VALUE EQUITY PORTFOLIO seeks high total return by investing in equity
securities which the Adviser believes to be undervalued relative to the stock
market in general at the time of purchase.
The BALANCED PORTFOLIO seeks high total return while preserving capital by
investing in a combination of undervalued equity securities and fixed income
securities.
The Fund is designed to meet the investment needs of discerning investors
who place a premium on quality and personal service. With Morgan Stanley Asset
Management Inc. as Adviser and Administrator (the "Adviser" and the
"Administrator"), and with Morgan Stanley & Co. Incorporated ("Morgan Stanley")
as Distributor, the Fund makes available to institutional investors and high net
worth individual investors a series of portfolios which benefit from the
investment expertise and commitment to excellence associated with Morgan Stanley
and its Affiliates.
This Prospectus is designed to set forth concisely the information about the
Fund that a prospective investor should know before investing and it should be
retained for future reference. The Fund also offers other portfolios which are
described in other prospectuses and under "Prospectus Summary" below. The Fund
currently offers the following portfolios: (i) GLOBAL AND INTERNATIONAL EQUITY
- -- Active Country Allocation, Asian Equity, Emerging Markets, European Equity,
Global Equity, Gold, International Equity, International Magnum, International
Small Cap, Japanese Equity and Latin American Portfolios; (ii) U.S. EQUITY --
Aggressive Equity, Emerging Growth, Equity Growth, MicroCap, Small Cap Value
Equity, U.S. Real Estate and Value Equity Portfolios; (iii) EQUITY AND FIXED
INCOME -- Balanced Portfolio; (iv) FIXED INCOME -- Emerging Markets Debt, Fixed
Income, Global Fixed Income, High Yield, Mortgage-Backed Securities and
Municipal Bond Portfolios; and (v) MONEY MARKET -- Money Market and Municipal
Money Market Portfolios. Additional information about the Fund is contained in a
"Statement of Additional Information", dated May 1, 1996, which is incorporated
herein by reference. The Statement of Additional Information and the
prospectuses pertaining to the other portfolios of the Fund are available upon
request and without charge by writing or calling the Fund at the address and
telephone number set forth above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1996.
<PAGE>
FUND EXPENSES
The following table illustrates the expenses and fees that a shareholder of
each Portfolio will incur:
<TABLE>
<CAPTION>
SMALL CAP VALUE VALUE EQUITY BALANCED
SHAREHOLDER TRANSACTION EXPENSES EQUITY PORTFOLIO PORTFOLIO PORTFOLIO
- ----------------------------------------------------------- ----------------- ------------- -----------
<S> <C> <C> <C>
Maximum Sales Load Imposed on Purchases
Class A.................................................. None None None
Class B.................................................. None None None
Maximum Sales Load Imposed on Reinvested Dividends
Class A.................................................. None None None
Class B.................................................. None None None
Deferred Sales Load
Class A.................................................. None None None
Class B.................................................. None None None
Redemption Fees
Class A.................................................. None None None
Class B.................................................. None None None
Exchange Fees
Class A.................................................. None None None
Class B.................................................. None None None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
<S> <C> <C> <C>
- -----------------------------------------------------------
<CAPTION>
SMALL CAP VALUE VALUE EQUITY BALANCED
(AS A PERCENTAGE OF AVERAGE NET ASSETS) EQUITY PORTFOLIO PORTFOLIO PORTFOLIO
----------------- ------------- -----------
<S> <C> <C> <C>
Management Fee (Net of Fee Waivers)*
Class A.................................................. 0.64% 0.43% 0.18%
Class B.................................................. 0.64% 0.43% 0.18%
12b-1 Fees
Class A.................................................. None None None
Class B.................................................. 0.25% 0.25% 0.25%
Other Expenses
Class A.................................................. 0.36% 0.27% 0.52%
Class B.................................................. 0.36% 0.27% 0.52%
------ ------ -----------
Total Operating Expenses (Net of Fee Waivers)*
Class A.................................................. 1.00% 0.70% 0.70%
Class B.................................................. 1.25% 0.95% 0.95%
------ ------ -----------
------ ------ -----------
</TABLE>
- ------------------------
*The Adviser has agreed to waive its management fee and/or reimburse each
Portfolio, if necessary, if such fees would cause the total annual operating
expenses of the Portfolios to exceed a specified percentage of their respective
average daily net assets. Set forth below, for each Portfolio, are the
management fees absent fee waivers and total operating expenses absent such fee
waivers and/or reimbursements as a percent of the average daily net assets of
the Class A shares and Class B shares, respectively.
2
<PAGE>
<TABLE>
<CAPTION>
TOTAL OPERATING EXPENSES
ABSENT FEE WAIVERS
MANAGEMENT FEE --------------------------
PORTFOLIO ABSENT FEE WAIVERS CLASS A CLASS B+
- -------------------------------------------------------------- --------------------- ------------ ------------
<S> <C> <C> <C>
Small Cap Value Equity........................................ 0.85% 1.21% 1.46%
Value Equity.................................................. 0.50% 0.77% 1.02%
Balanced...................................................... 0.50% 1.02% 1.27%
</TABLE>
- ------------------------------
+ Estimated.
As a result of these reductions, the Management Fees stated above are lower
than the contractual fees stated under "Management of the Fund." The Adviser
reserves the right to terminate any of its fee waivers and/or expense
reimbursements at any time in its sole discretion. For further information on
Fund expenses, see "Management of the Fund."
The purpose of the table above is to assist the investor in understanding
the various expenses that an investor in the Portfolios will bear directly or
indirectly. The Class A expenses and fees for each Portfolio are based on actual
figures for the fiscal year ended December 31, 1995. The Class B expenses and
fees for the Portfolios are based on estimates, assuming that the average daily
net assets of the Class B shares of each Portfolio will be $50,000,000. "Other
Expenses" include Board of Directors' fees and expenses, amortization of
organizational costs, filing fees, professional fees and costs for shareholder
reports. Due to the continuous nature of Rule 12b-1 fees, long term Class B
shareholders may pay more than the equivalent of the maximum front-end sales
charges otherwise permitted by the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. ("NASD").
The following example illustrates the expenses that you would pay on a
$1,000 investment assuming (1) a 5% annual rate of return and (2) redemption at
the end of each time period. As noted in the table above, the Portfolios charge
no redemption fees of any kind. The following example is based on total
operating expenses of the Portfolios after fee waivers.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Small Cap Value Equity Portfolio
Class A.......................................................... $ 10 $ 32 $ 55 $ 122
Class B.......................................................... 13 40 69 151
Value Equity Portfolio
Class A.......................................................... 7 22 39 87
Class B.......................................................... 10 30 53 117
Balanced Portfolio
Class A.......................................................... 7 22 39 87
Class B.......................................................... 10 30 53 117
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
The Fund intends to comply with all state laws that restrict investment
company expenses. Currently, the most restrictive state law requires that the
aggregate annual expenses of an investment company shall not exceed two and
one-half percent (2 1/2%) of the first $30 million of average net assets, two
percent (2%) of the next $70 million of average net assets, and one and one-half
percent (1 1/2%) of the remaining net assets of such investment company.
The Adviser has agreed to a reduction in the amounts payable to it, and to
reimburse any Portfolio, if necessary, if in any fiscal year the sum of the
Portfolio's expenses exceeds the limit set by applicable state laws.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following tables provide financial highlights for the Class A shares for
each of the Portfolios for the periods presented. The audited financial
highlights for the Class A shares for the fiscal year ended December 31, 1995
are part of the Fund's financial statements which appear in the Fund's December
31, 1995 Annual Report to Shareholders which are included in the Fund's
Statement of Additional Information. The Portfolio's financial highlights for
each of the periods in the five years ended December 31, 1995 have been audited
by Price Waterhouse LLP, whose unqualified report thereon is also included in
the Statement of Additional Information. Additional performance information for
the Class A shares is included in the Annual Report. The Annual Report and the
financial statements therein, along with the Statement of Additional
Information, are available at no cost from the Fund at the address and telephone
number noted on the cover page of this Prospectus. Financial Highlights are not
available for the new Class B shares since they were not offered as of December
31, 1995. Subsequent to October 31, 1992 (the Fund's prior fiscal year end) the
Fund changed its fiscal year end to December 31. The following information
should be read in conjunction with the financial statements and notes thereto.
4
<PAGE>
SMALL CAP VALUE EQUITY PORTFOLIO
<TABLE>
<CAPTION>
DECEMBER 17,
1992* TO YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1992 1993 1994 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.... $ 10.00 $ 10.14 $ 11.10 $ 10.80
------ ------------ ------------ ------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1)(2).......... 0.01 0.24 0.28 0.30
Net Realized and Unrealized
Gain/(Loss) on Investments........... 0.13 0.90 (0.01) 1.82
------ ------------ ------------ ------------
Total from Investment Operations...... 0.14 1.14 0.27 2.12
------ ------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income................. -- (0.18) (0.27) (0.38)
Net Realized Gain..................... -- -- (0.30) (0.63)
------ ------------ ------------ ------------
TOTAL DISTRIBUTIONS..................... -- (0.18) (0.57) (1.01)
------ ------------ ------------ ------------
NET ASSET VALUE, END OF PERIOD.......... $ 10.14 $ 11.10 $ 10.80 $ 11.91
------ ------------ ------------ ------------
------ ------------ ------------ ------------
TOTAL RETURN............................ 1.40% 11.33% 2.53% 20.63%
------ ------------ ------------ ------------
------ ------------ ------------ ------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)... $ 5,974 $26,775 $40,033 $51,919
Ratio of Expenses to Average Net
Assets (1)(2).......................... 1.00%** 1.00% 1.00% 1.00%
Ratio of Net Investment Income to
Average Net Assets (1)(2).............. 1.64%** 2.56% 2.67% 2.60%
Portfolio Turnover Rate................. 0% 29% 22% 36%
</TABLE>
- ------------------------------
<TABLE>
<S> <C> <C> <C> <C> <C>
(1) Effect of voluntary expense limitation during the
period:
Per share benefit to net investment
income............................. $ 0.13 $ 0.06 $ 0.03 $ 0.02
Ratios before expense limitation:
Expenses to Average Net Assets...... 23.14 %** 1.68 % 1.26 % 1.21 %
Net Investment Income (Loss) to
Average Net Assets................. (20.50 )%** 1.88 % 2.41 % 2.39 %
</TABLE>
(2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled
to receive a management fee calculated at an annual rate of 0.85% of the
average daily net assets of the Small Cap Value Equity Portfolio. The
Adviser has agreed to waive a portion of this fee and/ or reimburse expenses
of the Portfolio to the extent that the total operating expenses of the
Portfolio exceed 1.00% of the average daily net assets of the Class A shares
and 1.25% of the average daily net assets of the Class B shares. In the
period ended December 31, 1992, the years ended December 31, 1993, 1994 and
1995, the Adviser waived management fees and/or reimbursed expenses
totalling $38,000, $123,000, $94,000 and $97,000, respectively, for the
Small Cap Value Equity Portfolio.
* Commencement of Operations.
** Annualized.
5
<PAGE>
VALUE EQUITY PORTFOLIO
<TABLE>
<CAPTION>
JANUARY 31, TWO MONTHS
1990* TO YEAR ENDED YEAR ENDED ENDED YEAR ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1990 1991 1992 1992 1993 1994 1995
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD..... $ 10.00 $ 8.59 $ 10.24 $ 10.71 $ 11.31 $ 12.63 $ 11.50
------------ ------------ ------------ ------------ ------------ ------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment
Income (1)(2)......... 0.37 0.46 0.38 0.08 0.37 0.40 0.38
Net Realized and
Unrealized Gain/(Loss)
on investments........ (1.45) 1.67 0.48 0.52 1.31 (0.55) 3.30
------------ ------------ ------------ ------------ ------------ ------------ ------------
Total from Investment
Operations............ (1.08) 2.13 0.86 0.60 1.68 (0.15) 3.68
------------ ------------ ------------ ------------ ------------ ------------ ------------
DISTRIBUTIONS
Net Investment
Income................ (0.33) (0.48) (0.39) -- (0.36) (0.40) (0.47)
Net Realized Gain...... -- -- -- -- -- (0.58) (0.77)
------------ ------------ ------------ ------------ ------------ ------------ ------------
TOTAL DISTRIBUTIONS...... (0.33) (0.48) (0.39) -- (0.36) (0.98) (1.24)
------------ ------------ ------------ ------------ ------------ ------------ ------------
NET ASSET VALUE, END OF
PERIOD.................. $ 8.59 $ 10.24 $ 10.71 $ 11.31 $ 12.63 $ 11.50 $ 13.94
------------ ------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------ ------------
TOTAL RETURN............. (11.05)% 25.34% 8.51% 5.60% 15.14% (1.29)% 33.69%
------------ ------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------ ------------
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of Period
(Thousands)............. $18,178 $16,304 $25,013 $27,541 $54,598 $73,406 $147,365
Ratio of Expenses to
Average Net
Assets (1)(2)........... 0.70%** 0.70% 0.70% 0.70%** 0.70% 0.70% 0.70%
Ratio of Net Investment
Income to Average Net
Assets (1)(2)........... 5.46%** 4.57% 3.72% 4.41%** 3.23% 3.37% 3.01%
Portfolio Turnover
Rate.................... 70% 90% 56% 9% 51% 33% 43%
</TABLE>
- ------------------------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(1) Effect of voluntary expense limitation
during the period:
Per share benefit to
net
investment
income.............. $ 0.01 $ 0.02 $ 0.01 $ 0.01 $ 0.03 $ 0.01 $ 0.01
Ratios before expense limitation:
Expenses to Average
Net
Assets............ 0.88 ** 0.87 % 0.84 % 1.20 ** 0.95 % 0.80 % 0.77 %
Net Investment Income
to
Average Net
Assets.............. 5.28 ** 4.40 % 3.58 % 3.91 ** 2.98 % 3.27 % 2.94 %
</TABLE>
(2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled
to receive a management fee calculated at an annual rate of 0.50% of the
average daily net assets of the Value Equity Portfolio. The Adviser has
agreed to waive a portion of this fee and/or reimburse expenses of the
Portfolio to the extent that the total operating expenses of the Portfolio
exceed 0.70% of the average daily net assets of the Class A shares and 0.95%
of the average daily net assets of the Class B shares. In the period ended
October 31, 1990, the years ended October 31, 1991 and 1992, the two months
ended December 31, 1992, the years ended December 31, 1993, 1994 and 1995,
the Adviser waived management fees and/or reimbursed expenses totalling
$26,000, $25,000, $27,000, $24,000, $106,000, $73,000 and $85,000,
respectively, for the Value Equity Portfolio.
* Commencement of Operations.
** Annualized.
6
<PAGE>
BALANCED PORTFOLIO
<TABLE>
<CAPTION>
FEBRUARY 20, TWO MONTHS
1990* TO YEAR ENDED YEAR ENDED ENDED YEAR ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1990 1991 1992 1992 1993 1994 1995
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD..... $ 10.00 $ 9.62 $ 10.61 $ 11.00 $ 11.31 $ 11.13 $ 8.96
------------ ------------ ------------ ------------ ------------ ------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment
Income (1)(2)......... 0.40 0.59 0.58 0.10 0.44 0.42 0.39
Net Realized and
Unrealized Gain (Loss)
on Investments........ (0.46) 1.03 0.42 0.21 0.79 (0.64) 1.62
------------ ------------ ------------ ------------ ------------ ------------ ------------
Total from Investment
Operations............ (0.06) 1.62 1.00 0.31 1.23 (0.22) 2.01
------------ ------------ ------------ ------------ ------------ ------------ ------------
DISTRIBUTIONS
Net Investment
Income................ (0.32) (0.63) (0.58) -- (0.41) (0.49) (0.50)
In Excess of Net
Investment Income..... -- -- -- -- (0.08) -- --
Net Realized Gain...... -- -- (0.03) -- (0.06) (1.46) (0.49)
In Excess of Net
Realized Gain......... -- -- -- -- (0.86) -- --
------------ ------------ ------------ ------------ ------------ ------------ ------------
Total Distributions.... (0.32) (0.63) (0.61) -- (1.41) (1.95) (0.99)
------------ ------------ ------------ ------------ ------------ ------------ ------------
NET ASSET VALUE, END OF
PERIOD.................. $ 9.62 $ 10.61 $ 11.00 $ 11.31 $ 11.13 $ 8.96 $ 9.98
------------ ------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------ ------------
TOTAL RETURN............. (0.63)% 17.31% 9.57% 2.82% 12.09% (2.32)% 23.63%
------------ ------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------ ------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands)............. $ 37,444 $ 51,334 $ 40,332 $ 39,984 $ 29,684 $ 18,492 $ 22,642
Ratio of Expenses to
Average Net
Assets (1)(2)........... 0.70%** 0.70% 0.70% 0.70%** 0.70% 0.70% 0.70%
Ratio of Net Investment
Income to Average Net
Assets (1)(2)........... 6.81%** 5.99% 5.21% 5.29%** 3.88% 4.13% 4.10%
Portfolio Turnover
Rate.................... 19% 67% 40% 4% 136% 44% 26%
</TABLE>
- ------------------------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Effect of voluntary expense
(1) limitation during the period:
Per share benefit to
net
investment
income............. $ 0.01 $ 0.01 $ 0.01 $ 0.01 $ 0.04 $ 0.03 $ 0.03
Ratios before
expense limitation:
Expenses to Average
Net
Assets........... 0.90%** 0.78% 0.79% 1.00%** 1.02% 0.95% 1.02%
Net Investment
Income to
Average Net
Assets............. 6.61%** 5.91% 5.12% 4.99%** 3.56% 3.88% 3.78%
</TABLE>
(2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled
to receive a management fee calculated at an annual rate of 0.50% of the
average daily net assets of the Balanced Portfolio. The Adviser has agreed
to waive a portion of this fee and/or reimburse expenses of the Portfolio to
the extent that the total operating expenses of the Portfolio exceed 0.70%
of the average daily net assets of the Class A shares and 0.95% of the
average daily net assets of the Class B shares. In the period ended October
31, 1990, the years ended October 31, 1991 and 1992, the two months ended
December 31, 1992, the years ended December 31, 1993, 1994 and 1995, the
Adviser waived management fees and/or reimbursed expenses totalling $38,000,
$39,000, $40,000, $20,000, $115,000, $60,000 and $68,000, respectively, for
the Balanced Portfolio.
* Commencement of Operations.
** Annualized.
7
<PAGE>
PROSPECTUS SUMMARY
THE FUND
The Fund consists of twenty-eight portfolios, offering institutional
investors and high net worth individual investors a broad range of investment
choices coupled with the advantages of a no-load mutual fund with Morgan Stanley
and its affiliates providing customized services as Adviser, Administrator and
Distributor. Each portfolio, offers Class A shares and, except the International
Small Cap, Money Market and Municipal Money Market Portfolios (the "Single Class
Portfolios"), also offers Class B shares. Each portfolio has its own investment
objective and policies designed to meet specific goals. The investment objective
of each Portfolio described in this Prospectus is as follows:
- The SMALL CAP VALUE EQUITY PORTFOLIO seeks high long-term total return by
investing in undervalued equity securities of small- to medium-sized
corporations.
- The VALUE EQUITY PORTFOLIO seeks high total return by investing in equity
securities which the Adviser believes to be undervalued relative to the
stock market in general at the time of purchase.
- The BALANCED PORTFOLIO seeks high total return while preserving capital by
investing in a combination of undervalued equity securities and fixed
income securities.
The other portfolios of the Fund are described in other Prospectuses which
may be obtained from the Fund at the address and phone number noted on the cover
page of this Prospectus. The objectives of these other portfolios are listed
below:
GLOBAL AND INTERNATIONAL EQUITY:
- The ACTIVE COUNTRY ALLOCATION PORTFOLIO seeks long-term capital
appreciation by investing in accordance with country weightings determined
by the Adviser in equity securities of non-U.S. issuers which, in the
aggregate, replicate broad country indices.
- The ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Asian issuers.
- The CHINA GROWTH PORTFOLIO seeks to provide long-term capital appreciation
by investing primarily in equity securities of issuers in The People's
Republic of China, Hong Kong and Taiwan.
- The EMERGING MARKETS PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of emerging country issuers.
- The EUROPEAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of European issuers.
- The GLOBAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of issuers throughout the world,
including United States issuers.
- The GOLD PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of foreign and domestic issuers engaged in
gold-related activities.
- The INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-United States issuers.
8
<PAGE>
- The INTERNATIONAL MAGNUM PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers in accordance
with EAFE country (as defined in "Investment Objectives and Policies"
below) weightings determined by the Adviser.
- The INTERNATIONAL SMALL CAP PORTFOLIO seeks long-term capital appreciation
by investing primarily in equity securities of non-United States issuers
with equity market capitalizations of less than $1 billion.
- The JAPANESE EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Japanese issuers.
- The LATIN AMERICAN PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Latin American issuers and
debt securities issued or guaranteed by Latin American governments or
governmental entities.
US EQUITY:
- The AGGRESSIVE EQUITY PORTFOLIO seeks capital appreciation by investing
primarily in corporate equity and equity-linked securities.
- The EMERGING GROWTH PORTFOLIO seeks long-term capital appreciation by
investing primarily in growth-oriented equity securities of small- to
medium-sized corporations.
- The EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation by
investing in growth-oriented equity securities of medium and large
capitalization companies.
- The MICROCAP PORTFOLIO seeks long-term capital appreciation by investing
primarily in growth-oriented equity securities of small corporations.
- The U.S. REAL ESTATE PORTFOLIO seeks to provide above average current
income and long-term capital appreciation by investing primarily in equity
securities of companies in the U.S. real estate industry, including real
estate investment trusts.
FIXED INCOME:
- The EMERGING MARKETS DEBT PORTFOLIO seeks high total return by investing
primarily in debt securities of government, government-related and
corporate issuers located in emerging countries.
- The FIXED INCOME PORTFOLIO seeks to produce a high total return consistent
with the preservation of capital by investing in a diversified portfolio
of fixed income securities.
- The GLOBAL FIXED INCOME PORTFOLIO seeks to produce an attractive real rate
of return while preserving capital by investing in fixed income securities
of issuers throughout the world, including U.S. issuers.
- The HIGH YIELD PORTFOLIO seeks to maximize total return by investing in a
diversified portfolio of high yield fixed income securities that offer a
yield above that generally available on debt securities in the three
highest rating categories of the recognized rating services.
- The MORTGAGE-BACKED SECURITIES PORTFOLIO seeks to produce as high a level
of current income as is consistent with the preservation of capital by
investing primarily in a variety of investment-grade mortgage-backed
securities.
9
<PAGE>
- The MUNICIPAL BOND PORTFOLIO seeks to produce a high level of current
income consistent with the preservation of principal through investment
primarily in municipal obligations, the interest on which is exempt from
federal income tax.
MONEY MARKET:
- The MONEY MARKET PORTFOLIO seeks to maximize current income and preserve
capital while maintaining high levels of liquidity through investing in
high quality money market instruments with remaining maturities of one
year or less.
- The MUNICIPAL MONEY MARKET PORTFOLIO seeks to maximize current tax-exempt
income and preserve capital while maintaining high levels of liquidity
through investing in high quality money market instruments with remaining
maturities of one year or less which are exempt from federal income tax.
INVESTMENT MANAGEMENT
Morgan Stanley Asset Management Inc., a wholly owned subsidiary of Morgan
Stanley Group Inc., which, together with its affiliated asset management
companies, at December 31, 1995 had approximately $57.4 billion in assets under
management as an investment manager or as a fiduciary adviser, acts as
investment adviser to the Fund and each of its Portfolios. See "Management of
the Fund -- Investment Adviser" and "-- Administrator."
HOW TO INVEST
Class A shares of each Portfolio are offered directly to investors at net
asset value with no sales commission or 12b-1 charges. Class B shares of each
Portfolio are offered at net asset value with no sales commission, but with a
12b-1 fee, which is accrued daily and paid quarterly, equal to 0.25% of the
Class B shares' average daily net assets on an annualized basis. Share purchases
may be made by sending investments directly to the Fund or through the
Distributor. Shares in a Portfolio account opened prior to January 2, 1996
(each, a "Pre-1996 Account") were designated Class A shares on January 2, 1996.
For a Portfolio account opened on or after January 2, 1996 (a "New Account"),
the minimum initial investment is $500,000 for Class A shares of each Portfolio
and $100,000 for Class B shares of each Portfolio. Certain exceptions to the
foregoing minimums apply to (1) shares in a Pre-1996 Account with a value of
$100,000 or more on March 1, 1996 (a "Grandfathered Class A Account"); (2)
Portfolio accounts held by officers of the Adviser and its affiliates; and (3)
certain advisory or asset allocation accounts, such as Total Funds Management
accounts, managed by Morgan Stanley or its affiliates, including the Adviser
("Managed Accounts"). The Adviser reserves the right in its sole discretion to
determine which of such advisory or asset allocation accounts shall be Managed
Accounts. For information regarding Managed Accounts please contact your Morgan
Stanley account representative or the Fund at the telephone number provided on
the cover of this Prospectus. Shares in a Pre-1996 Account with a value of less
than $100,000 on March 1, 1996 (a "Grandfathered Class B Account") converted to
Class B shares on March 1, 1996. The minimum investment levels may be waived at
the discretion of the Adviser for (i) certain employees and customers of Morgan
Stanley or its affiliates and certain trust departments, brokers, dealers,
agents, financial planners, financial services firms, or investment advisers
that have entered into an agreement with Morgan Stanley or its affiliates; and
(ii) retirement and deferred compensation plans and trusts used to fund such
plans, including, but not limited to, those defined in Section 401(a), 403(b) or
457 of the Internal Revenue Code of 1986, as amended, and "rabbi trusts". See
"Purchase of Shares -- Minimum Investment and Account Sizes; Conversion from
Class A to Class B Shares."
10
<PAGE>
The minimum subsequent investment for each Portfolio account is $1,000
(except for automatic reinvestment of dividends and capital gains distributions
for which there is no minimum). Such subsequent investments will be applied to
purchase additional shares in the same class held by a shareholder in a
Portfolio account. See "Purchase of Shares -- Additional Investments."
HOW TO REDEEM
Class A shares or Class B shares of each Portfolio may be redeemed at any
time, without cost, at the net asset value per share of shares of the applicable
class next determined after receipt of the redemption request. The redemption
price may be more or less than the purchase price. Certain redemptions may cause
involuntary redemption or automatic conversion. Class A or Class B shares held
in New Accounts are subject to involuntary redemption if shareholder
redemption(s) of such shares reduces the value of such account to less than
$100,000 for a continuous 60-day period. Involuntary redemption does not apply
to Managed Accounts, Grandfathered Class A Accounts and Grandfathered Class B
Accounts, regardless of the value of such accounts. Class A shares in a New
Account will convert to Class B shares if shareholder redemption(s) of such
shares reduces the value of such account to less than $500,000 for a continuous
60-day period. Class B shares in a New Account will convert to Class A shares if
shareholder purchases of additional Class B shares or market activity cause the
value of the Class B shares in the New Account to increase to $500,000 or more.
See "Purchase of Shares -- Minimum Account Sizes and Involuntary Redemption of
Shares" and "Redemption of Shares."
RISK FACTORS
The investment policies of each of the Portfolios entail certain risks and
considerations of which an investor should be aware. Each Portfolio may invest
in securities of foreign issuers and forward foreign currency exchange
contracts, which are subject to certain risks not typically associated with U.S.
securities. Because the Small Cap Value Equity Portfolio seeks high long-term
total return by investing primarily in small- to medium-sized corporations which
are more vulnerable to financial risks and other risks than larger corporations,
investments may involve a higher degree of risk and price volatility than
investments in the general equity markets. See "Investment Objectives and
Policies" and "Additional Investment Information." In addition, each Portfolio
may invest in repurchase agreements, lend its portfolio securities and purchase
securities on a when-issued basis or delayed delivery basis and invest in
forward foreign currency exchange contracts to hedge currency risk associated
with investments in non-U.S. dollar-denominated securities. The Portfolios may
also invest indirectly in securities through sponsored or unsponsored American
Depositary Receipts. Each Portfolio may invest in short-term or medium-term debt
securities or hold cash or cash equivalents for temporary defensive purposes.
The Portfolios may also invest in stock options, stock futures contracts and
options on stock futures contracts. Each of these investment strategies involves
specific risks which are described under "Investment Objectives and Policies"
and "Additional Investment Information" herein and under "Investment Objectives
and Policies" in the Statement of Additional Information.
11
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of each Portfolio is described below, together with
the policies the Fund employs in its efforts to achieve these objectives. Each
Portfolio's investment objective is a fundamental policy which may not be
changed without the approval of a majority of the Portfolio's outstanding voting
securities. There is no assurance that the Fund will attain its objectives. The
investment policies described below are not fundamental policies and may be
changed without shareholder approval.
THE SMALL CAP VALUE EQUITY PORTFOLIO
The investment objective of the Small Cap Value Equity Portfolio is to
provide high total return by investing in equity securities of small- to
medium-sized corporations that the Adviser believes to be undervalued relative
to the stock market in general at the time of purchase. The Portfolio invests
primarily in corporations domiciled in the U.S. with equity market
capitalizations that range generally from $70 million up to $1 billion, but may
from time to time invest in similar size foreign corporations. Under normal
circumstances, the Portfolio will invest at least 65% of the value of its total
assets in equity securities of corporations whose equity market capitalization
is up to $1 billion. The Portfolio may invest up to 35% of the value of its
total assets in equity securities of corporations which are generally smaller
than the 500 largest corporations in the United States. With respect to the
Portfolio, equity securities include common and preferred stocks, convertible
securities, rights and warrants to purchase common stocks, and similar equity
interests, such as trusts or partnership interests. These investments may or may
not carry voting rights.
The Adviser invests with the philosophy that a diversified portfolio of
undervalued, small- to medium-sized companies will provide high total return in
the long run.
Companies considered attractive will have the following characteristics:
1. The market prices of the stocks will be undervalued relative to the
normal earning power of the companies;
2. Stock prices will be low relative to the intrinsic value of the
companies' assets;
3. Stocks will most often have yields distinctly above the average of
companies with similar capitalizations; and
4. Stocks will be of high quality, in the Adviser's judgment, as
evaluated by the companies' balance sheets, income statements, franchises
and product competitiveness.
The thrust of this approach is to seek investments in stocks for which
investor enthusiasm is currently low, as reflected in their valuation, but which
have the financial and fundamental features, which, according to the Adviser's
assessment, will allow the stocks to achieve a higher valuation. Value is
achieved and exposure is reduced for the Portfolio when the investment
community's perceptions improve and the stocks approach what the Adviser
believes is fair valuation.
The Adviser takes a long-term approach by placing a strong emphasis on its
ability to identify attractive values. The Adviser does not intend to respond to
short-term market fluctuations or to acquire securities for the
12
<PAGE>
purpose of short-term trading. However, the Adviser may take advantage of
short-term opportunities that are consistent with its objective of high total
return. The Portfolio will maintain diversity among industries and does not
expect to invest more than 25% of its total assets in the stocks of issuers in
any one industry.
The Portfolio invests primarily in small- to medium-sized companies
domiciled in the U.S. The portfolio may, on occasion, invest in equity
securities of foreign issuers that trade on a United States exchange or
over-the-counter in the form of American Depositary Receipts or common stocks.
See "Additional Investment Information."
Any remaining assets of the Portfolio not invested as described above may be
invested in certain securities or obligations as set forth in "Additional
Investment Information" below.
THE VALUE EQUITY PORTFOLIO
The investment objective of the Value Equity Portfolio is to achieve high
total return (i.e., long-term growth of capital and high current income) by
investing in equity securities that the Adviser believes to be undervalued
relative to the stock market in general at the time of purchase. It seeks
superior market cycle total returns, with an emphasis on strong relative
performance in falling markets. The Portfolio invests primarily in equity
securities of large capitalization companies mainly domiciled in the United
States. With respect to the Portfolio, equity securities include common and
preferred stocks, convertible securities, and rights and warrants to purchase
common stocks. Under normal circumstances, the Portfolio will invest at least
65% of the value of its total assets in equity securities.
The Adviser invests with the philosophy that a diversified portfolio of
undervalued equity securities will outperform the market over the long term, as
well as preserve principal in difficult market environments. Companies
considered attractive will have the following characteristics: 1) stocks most
often will have distinctly above average dividend yields, 2) the market prices
of the stocks will be undervalued relative to the normal earning power of the
company, 3) many stocks will sell at close to or below the replacement value of
their assets and 4) most stocks' market prices will have underperformed the
general market due to a lower level of investor expectations regarding the
company outlook. The thrust of this approach is to seek investments where
current investor enthusiasm is low, as reflected in their valuations. Exposure
is reduced when the investment community's perceptions improve and the company
approaches fair valuation.
The Adviser takes a long-term investment approach by placing a strong
emphasis on its ability to determine attractive values and does not try to
determine short-term changes in the general market level. The Portfolio will
maintain diversity among industries by not investing more than 25% of its total
assets in equity securities of issuers in any one industry. The Portfolio may
invest up to 25% of its total assets in the equity securities of foreign
issuers, including American Depositary Receipts. See "Additional Investment
Information."
Any remaining assets of the Portfolio not invested as described above may be
invested in certain securities or obligations as set forth in "Additional
Investment Information" below.
THE BALANCED PORTFOLIO
The investment objective of the Balanced Portfolio is to achieve high total
return while preserving capital by investing in a combination of undervalued
equity securities and fixed income securities. The Portfolio seeks
13
<PAGE>
strong total returns in all market conditions, with a special emphasis on
minimizing interim declines during falling equity markets. It primarily invests
in large capitalization equity securities, intermediate-maturity bonds and cash
equivalents.
The Adviser uses a valuation-driven balanced portfolio philosophy which
combines separate equity, fixed income and asset allocation strategies. The
equity investment approach is the same one used for the Value Equity Portfolio.
This produces a portfolio of stocks with low price-to-earnings and price-to-book
ratios and high dividend yields. The fixed income strategy values bonds using
historical yield differentials. Short and intermediate government, corporate and
mortgage bonds are used exclusively to implement the Portfolio's fixed income
strategy. The asset allocation strategy shifts the stock/bond/cash equivalent
mix relative to calculated risk and return levels. All three strategies use
historical capital market behavior to reach conclusions.
The Portfolio will typically maintain between 35% and 65% of its total
assets invested in equity securities, depending upon the Adviser's assessment of
market conditions. With respect to the Portfolio, equity securities include
common and preferred stocks, convertible securities, and rights and warrants to
purchase common stocks. In overvalued equity markets, the common stock exposure
will be at the low end of this range. It is expected that equity exposure will
average approximately 55% over time.
Fixed income securities in which the Portfolio may invest include U.S.
Government securities, mortgage-backed securities, corporate bonds, bank
obligations and other short-term money market instruments. The average maturity
of the fixed income securities in the Portfolio will, under normal
circumstances, be approximately five years, although this will vary with
changing market conditions. Up to 25% of the Portfolio's total assets may be
invested in the securities of foreign issuers. See "Additional Investment
Information."
ADDITIONAL INVESTMENT INFORMATION
DEPOSITARY RECEIPTS. Each portfolio is permitted to invest indirectly in
securities of foreign companies through sponsored or unsponsored American
Depositary Receipts ("ADRs"), Global Depositary Receipts ("GDRs") and other
types of Depositary Receipts (which, together with ADRs and GDRs, are
hereinafter collectively referred to as "Depositary Receipts"), to the extent
such Depositary Receipts are or become available. Depositary Receipts are not
necessarily denominated in the same currency as the underlying securities. In
addition, the issuers of the securities underlying unsponsored Depositary
Receipts are not obligated to disclose material information in the U.S. and,
therefore, there may be less information available regarding such issuers and
there may not be a correlation between such information and the market value of
the Depositary Receipts. ADRs are Depositary Receipts typically issued by a U.S.
financial institution which evidence ownership interests in a security or pool
of securities issued by a foreign issuer. GDRs and other types of Depositary
Receipts are typically issued by foreign banks or trust companies, although they
also may be issued by U.S. financial institutions, and evidence ownership
interests in a security or pool of securities issued by either a foreign or a
U.S. corporation. Generally, Depositary Receipts in registered form are designed
for use in the U.S. securities market and Depositary Receipts in bearer form are
designed for use in securities markets outside the U.S. For purposes of each
Portfolio's investment policies, the Portfolio's investments in Depositary
Receipts will be deemed to be investments in the underlying securities.
FOREIGN INVESTMENT. Each Portfolio may invest in securities of foreign
issuers. Investment in obligations of foreign issuers and in foreign branches of
domestic banks involves somewhat different investment risks than
14
<PAGE>
those affecting obligations of U.S. issuers. There may be limited publicly
available information with respect to foreign issuers, and foreign issuers are
not generally subject to uniform accounting, auditing and financial standards
and requirements comparable to those applicable to U.S. companies. There may
also be less government supervision and regulation of foreign securities
exchanges, brokers and listed companies than in the U.S. Many foreign securities
markets have substantially less volume than U.S. national securities exchanges,
and securities of some foreign issuers are less liquid and more volatile than
securities of comparable domestic issuers. Brokerage commissions and other
transaction costs on foreign securities exchanges are generally higher than in
the U.S. Dividends and interest paid by foreign issuers may be subject to
withholding and other foreign taxes, which may decrease the net return on
foreign investments as compared to dividends and interest paid to the Portfolios
by domestic companies. It is not expected that a Portfolio or its shareholders
would be able to claim a credit for U.S. tax purposes with respect to any such
foreign taxes. See "Taxes." Additional risks include future political and
economic developments, the possibility that a foreign jurisdiction might impose
or change withholding taxes on income payable with respect to foreign
securities, possible seizure, nationalization or expropriation of the foreign
issuer or foreign deposits and the possible adoption of foreign governmental
restrictions such as exchange controls.
Such investments in securities of foreign issuers are frequently denominated
in foreign currencies, and since the Portfolios may temporarily hold uninvested
reserves in bank deposits in foreign currencies, the value of each Portfolio's
assets as measured in U.S. dollars may be affected favorably or unfavorably by
changes in currency rates and in exchange control regulations, and the
Portfolios may incur costs in connection with conversions between various
currencies.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. Each Portfolio may enter into
forward foreign currency exchange contracts ("forward contracts") that provide
for the purchase or sale of an amount of a specified foreign currency at a
future date. Purposes for which such contracts may be used include protecting
against a decline in a foreign currency against the U.S. dollar between the
trade date and settlement date when the Portfolio purchases or sells non-U.S.
dollar denominated securities, locking in the U.S. dollar value of dividends
declared on securities held by the Portfolio and generally protecting the U.S.
dollar value of securities held by a Portfolio against exchange rate
fluctuation. Such contracts may also be used as a protective measure against the
effects of fluctuating rates of currency exchange and exchange control
regulations. While such forward contracts may limit losses to a Portfolio as a
result of exchange rate fluctuation, they will also limit any gains that may
otherwise have been realized. See "Investment Objectives and Policies -- Forward
Foreign Currency Exchange Contracts" in the Statement of Additional Information.
LOANS OF PORTFOLIO SECURITIES. Each Portfolio may lend its securities to
brokers, dealers, domestic and foreign banks or other financial institutions for
the purpose of increasing its net investment income. These loans must be secured
continuously by cash or equivalent collateral, or by a letter of credit at least
equal to the market value of the securities loaned plus accrued interest or
income. There may be a risk of delay in recovery of the securities or even loss
of rights in the collateral should the borrower of the securities fail
financially. Each Portfolio will not enter into securities loan transactions
exceeding, in the aggregate, 33 1/3% of the market value of the Portfolio's
total assets. Securities lending entails certain risks of delay in recovery or
loss of rights in collateral in the event of the insolvency of the borrower. For
more detailed information about securities lending see "Investment Objectives
and Policies" in the Statement of Additional Information.
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<PAGE>
MONEY MARKET INSTRUMENTS. Each Portfolio is permitted to invest in money
market instruments, although the Portfolios intend to stay invested in
securities satisfying their primary investment objective to the extent
practical. Each Portfolio may make money market investments pending other
investment or settlement for liquidity, or in adverse market conditions. The
money market investments permitted for the Portfolios include: obligations of
the United States Government and its agencies and instrumentalities; other debt
securities; commercial paper including bank obligations; certificates of deposit
(including Eurodollar certificates of deposit); and repurchase agreements. For
more detailed information about these money market investments, see "Description
of Securities and Ratings" in the Statement of Additional Information.
REPURCHASE AGREEMENTS. Each Portfolio may enter into repurchase agreements
with brokers, dealers or banks that meet the credit guidelines established by
the Fund's Board of Directors. In a repurchase agreement, the Portfolio buys a
security from a seller that has agreed to repurchase it at a mutually agreed
upon date and price, reflecting the interest rate effective for the term of the
agreement. The term of these agreements is usually from overnight to one week,
and never exceeds one year. Repurchase agreements may be viewed as a fully
collateralized loan of money by the Portfolio to the seller. Each Portfolio
always receives securities with a market value at least equal to the purchase
price (including accrued interest) as collateral, and this value is maintained
during the term of the agreement. If the seller defaults and the collateral
value declines, the Portfolio might incur a loss. If bankruptcy proceedings are
commenced with respect to the seller, the Portfolio's realization upon the
collateral may be delayed or limited. The aggregate of certain repurchase
agreements and certain other investments is limited as set forth under
"Investment Limitations."
STOCK OPTIONS, FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. In order
to remain fully invested, and to reduce transaction costs, each Portfolio may
utilize appropriate stock futures contracts and options to a limited extent.
Because transaction costs associated with futures and options may be lower than
the costs of investing in stocks directly, it is expected that the use of index
futures and options to facilitate cash flows may reduce a Portfolio's overall
transaction costs. The Portfolios will engage in futures and options
transactions only for hedging purposes.
Each Portfolio may enter into futures contracts provided that not more than
5% of the Portfolio's total assets are required as deposit to secure obligations
under such contracts.
The primary risks associated with the use of futures and options are (i)
imperfect correlation between the change in market value of the stocks held by
the Portfolio and the prices of futures and options relating to the stocks
purchased or sold by the Portfolio; and (ii) possible lack of a liquid secondary
market for a futures contract and the resulting inability to close a futures
position which could have an adverse impact on the Portfolio's ability to hedge.
In the opinion of the Board of Directors, the risk that the Portfolio will be
unable to close out a futures position or options contract will be minimized by
only entering into futures contracts or options transactions traded on national
exchanges and for which there appears to be a liquid secondary market. For more
detailed information about futures transactions see "Investment Objectives and
Policies" in the Statement of Additional Information.
TEMPORARY INVESTMENTS. During periods in which the Adviser believes changes
in economic, financial or political conditions make it advisable a Portfolio may
reduce its holdings in equity and other securities, for temporary defensive
purposes, and the Portfolio may invest in certain short-term (less than twelve
months to maturity) and medium-term (not greater than five years to maturity)
debt securities or may hold cash. The short-
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<PAGE>
term and medium-term debt securities in which a Portfolio may invest consist of
(a) obligations of the U.S. or foreign country governments, their respective
agencies or instrumentalities; (b) bank deposits and bank obligations (including
certificates of deposit, time deposits and bankers' acceptances) of U.S. or
foreign country banks denominated in any currency; (c) floating rate securities
and other instruments denominated in any currency issued by international
development agencies; (d) finance company and corporate commercial paper and
other short-term corporate debt obligations of U.S. and foreign country
corporations meeting the Portfolio's credit quality standards; and (e)
repurchase agreements with banks and broker-dealers with respect to such
securities. For temporary defensive purposes, the Portfolios intend to invest
only in short-term and medium-term debt securities that the Adviser believes to
be of high quality, i.e., subject to relatively low risk of loss of interest or
principal.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each Portfolio may purchase
securities on a when-issued or delayed delivery basis. In such transactions,
instruments are bought with payment and delivery taking place in the future in
order to secure what is considered to be an advantageous yield or price at the
time of the transaction. Delivery of and payment for these securities may take
as long as a month or more after the date of the purchase commitment, but will
take place no more than 120 days after the trade date. Each Portfolio will
maintain with the Custodian a separate account with a segregated portfolio of
high-grade debt securities or cash in an amount at least equal to these
commitments. The payment obligation and the interest rates that will be received
are each fixed at the time a Portfolio enters into the commitment and no
interest accrues to the Portfolio until settlement. Thus, it is possible that
the market value at the time of settlement could be higher or lower than the
purchase price if the general level of interest rates has changed. It is a
current policy of each Portfolio not to enter into when-issued commitments and
delayed delivery commitments exceeding, in the aggregate, 15% of the market
value of the Portfolio's total assets less liabilities other than the
obligations created by these commitments.
INVESTMENT LIMITATIONS
As a diversified investment company, each Portfolio is subject to the
following limitations: (a) as to 75% of its total assets, a Portfolio may not
invest more than 5% of its total assets in the securities of any one issuer,
except obligations of the United States Government and its agencies and
instrumentalities, and (b) a Portfolio may not own more than 10% of the
outstanding voting securities of any one issuer.
Each Portfolio also operates under certain investment restrictions that are
deemed fundamental limitations and may be changed only with the approval of the
holders of a majority of such Portfolio's outstanding shares. See "Investment
Limitations" in the Statement of Additional Information. In addition, each
Portfolio operates under certain non-fundamental investment limitations as
described below and in the Statement of Additional Information. Each Portfolio
may not (i) enter into repurchase agreements with more than seven days to
maturity if, as a result, more than 10% of the market value of the Portfolio's
net assets would be invested in such repurchase agreements and other investments
for which market quotations are not readily available or which are otherwise
illiquid; (ii) borrow money, except from banks for extraordinary or emergency
purposes, and then only in amounts up to 10% of the value of the Portfolio's
total assets, taken at cost at the time of borrowing, or purchase securities
while borrowings exceed 5% of its total assets; (iii) mortgage, pledge or
hypothecate any assets except in connection with any such borrowing in amounts
up to 10% of the value of the Portfolio's net
17
<PAGE>
assets at the time of borrowing; (iv) invest in fixed time deposits with a
duration of over seven calendar days; or (v) invest in fixed time deposits with
a duration of from two business days to seven calendar days if more than 10% of
the Portfolio's total assets would be invested in these deposits.
MANAGEMENT OF THE FUND
INVESTMENT ADVISER. Morgan Stanley Asset Management Inc. is the Investment
Adviser and Administrator of the Fund and each Portfolio. The Adviser provides
investment advice and portfolio management services, pursuant to an Investment
Advisory Agreement and, subject to the supervision of the Fund's Board of
Directors, makes each Portfolio's day-to-day investment decisions, arranges for
the execution of portfolio transactions and generally manages each Portfolio's
investments. The Adviser is entitled to receive from each Portfolio an annual
management fee, payable quarterly, equal to the percentage of average daily net
assets set forth in the table below. However, the Adviser has agreed to a
reduction in the fees payable to it and to reimburse the Portfolios, if
necessary, if such fees would cause the total annual operating expenses of any
Portfolio to exceed the respective percentage of average daily net assets set
forth in the table below.
<TABLE>
<CAPTION>
MAXIMUM TOTAL OPERATING
EXPENSES
AFTER FEE WAIVERS
MANAGEMENT ----------------------------
PORTFOLIO FEE CLASS A CLASS B
- ------------------------------------ ------------- ------------- -------------
<S> <C> <C> <C>
Small Cap Value Equity Portfolio 0.85% 1.00% 1.25%
Value Equity Portfolio 0.50% 0.70% 0.95%
Balanced Portfolio 0.50% 0.70% 0.95%
</TABLE>
The Adviser, with principal offices at 1221 Avenue of the Americas, New
York, New York 10020, conducts a worldwide portfolio management business,
providing a broad range of portfolio management services to customers in the
United States and abroad. At December 31, 1995, the Adviser, together with its
affiliated asset management companies, managed investments totaling
approximately $57.4 billion, including approximately $41.9 billion under active
management and $15.5 billion as Named Fiduciary or Fiduciary Adviser. See
"Management of the Fund" in the Statement of Additional Information.
PORTFOLIO MANAGERS
Stephen C. Sexauer and Alford E. Zick, Jr. have primary responsibility for
managing the Balanced Portfolio and the Value Equity Portfolio; Mr. Sexauer and
Mr. Zick have had such responsibility since the Portfolios' inception in
February and January, 1990, respectively. Christian K. Stadlinger has had
primary responsibility for managing the Small Cap Value Equity Portfolio and has
had such responsibility since its inception in December, 1992.
STEPHEN C. SEXAUER. Mr. Sexauer is a Principal of Morgan Stanley and is a
member of the investment management team of the Adviser's Chicago affiliate as
well as Vice President of the Adviser. In addition to portfolio management, his
equity research responsibilities include aerospace, industrials, capital goods,
transportation, and diversified financial companies. Mr. Sexauer joined the firm
in July 1989 after three years as a Vice President at Salomon Brothers.
Previously, he was with Merrill Lynch Economics and Wharton Econometrics. Mr.
Sexauer received a B.S. in Economics from the University of Illinois and an
M.B.A. in Economics and Statistics from the University of Chicago.
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<PAGE>
CHRISTIAN K. STADLINGER. Mr. Stadlinger is a Vice President of the Adviser
and manages the small-cap value equity product of the Adviser's Chicago
affiliate. He became a member of the Adviser's Chicago large cap value portfolio
management team, specializing in quantitative and fundamental research, upon
completion of his doctoral dissertation at Northwestern University in April
1989. Mr. Stadlinger was the catalyst in the development of the Adviser's
small-cap value product, and he continues to research and develop structured
valuation techniques in the area of small cap investing. Mr. Stadlinger has a
degree in Computer Science and Economics from the University of Vienna, a Ph.D.
in Economics from Northwestern University, and is a Certified Financial Analyst.
ALFORD E. ZICK, JR. Mr. Zick is a Principal of Morgan Stanley and is a
member of the investment management team of the Adviser's Chicago affiliate. In
addition to portfolio management, his equity research responsibilities include
consumer staples, retail and insurance companies. He became a member of the
Adviser's Chicago investment management team in August 1989, after an extensive
career in asset management with Chicago Pacific Corporation, Staley Continental,
Inc., and A.E. STALEY Manufacturing Company. Mr. Zick has a degree in accounting
from the University of Illinois.
ADMINISTRATOR. The Adviser also provides the Fund with administrative
services pursuant to an Administration Agreement. The services provided under
the Administration Agreement are subject to the supervision of the Officers and
the Board of Directors of the Fund and include day-to-day administration of
matters related to the corporate existence of the Fund, maintenance of its
records, preparation of reports, supervision of the Fund's arrangements with its
custodian, and assistance in the preparation of the Fund's registration
statements under federal and state laws. The Administration Agreement also
provides that the Administrator, through its agents, will provide the Fund
dividend disbursing and transfer agent services. For its services under the
Administration Agreement, the Fund pays the Adviser a monthly fee which, on an
annual basis equals, 0.15% of the average daily net assets of each Portfolio.
Under an agreement between the Adviser and The Chase Manhattan Bank, N.A.
("Chase"), Chase provides certain administrative services to the Fund. In a
merger completed on September 1, 1995, Chase succeeded to all of the rights and
obligations under the U.S. Trust Administration Agreement between the Adviser
and the United States Trust Company of New York ("U.S. Trust"), pursuant to
which U.S. Trust had agreed to provide certain administrative services to the
Fund. Pursuant to a delegation clause in the U.S. Trust Administration
Agreement, U.S. Trust delegated its administration responsibilities to Chase
Global Funds Services Company ("CGFSC"), formerly known as Mutual Funds Service
Company which after the merger with Chase is a subsidiary of Chase and will
continue to provide certain administrative services to the Fund. The Adviser
supervises and monitors such administrative services provided by CGFSC. The
services provided under the Administration Agreement and the U.S. Trust
Administration Agreement are also subject to the supervision of the Board of
Directors of the Fund. The Board of Directors of the Fund has approved the
provision of services described above pursuant to the Administration Agreement
and the U.S. Trust Administration Agreement as being in the best interests of
the Fund. CGFSC's business address is 73 Tremont Street, Boston, Massachusetts
02108-3913. For additional information regarding the Administration Agreement or
the U.S. Trust Administration Agreement, see "Management of the Fund" in the
Statement of Additional Information.
DIRECTORS AND OFFICERS. Pursuant to the Fund's Articles of Incorporation,
the Board of Directors decides upon matters of general policy and reviews the
actions of the Fund's Adviser, Administrator and Distributor. The Officers of
the Fund conduct and supervise its daily business operations.
19
<PAGE>
DISTRIBUTOR. Morgan Stanley serves as the exclusive Distributor of the
shares of the Fund. Under its Distribution Agreement with the Fund, Morgan
Stanley sells shares of each Portfolio upon the terms and at the current
offering price described in this Prospectus. Morgan Stanley is not obligated to
sell any certain number of shares of any Portfolio.
Each Portfolio currently offers only the classes of shares offered by this
Prospectus. Each Portfolio may in the future offer one or more classes of shares
with features, distribution expenses or other expenses that are different from
those of the classes currently offered.
The Fund has adopted a Plan of Distribution with respect to the Class B
shares of each Portfolio pursuant to Rule 12b-1 under the 1940 Act (each, a
"Plan"). Under each Plan, the Distributor is entitled to receive from each
Portfolio a distribution fee, which is accrued daily and paid quarterly, of
0.25% of the average daily net assets of the Class B shares of each Portfolio on
an annualized basis. The Distributor expects to reallocate most of its fee to
its investment representatives. The Distributor may, in its discretion,
voluntarily waive from time to time all or any portion of its distribution fee
and each of the Distributor and the Adviser is free to make additional payments
out of its own assets to promote the sale of Fund shares, including payments
that compensate financial institutions for distribution services or shareholder
services.
Each Plan is designed to compensate the Distributor for its services, not to
reimburse the Distributor for its expenses, and the Distributor may retain any
portion of the fee that it does not expend in fulfillment of its obligations to
the Fund.
EXPENSES. Each Portfolio is responsible for payment of certain other fees
and expenses (including legal fees, accountants' fees, custodial fees and
printing and mailing costs) specified in the Administration and Distribution
Agreements.
20
<PAGE>
PURCHASE OF SHARES
Class A and Class B shares of each Portfolio may be purchased, without sales
commission, at the net asset value per share next determined after receipt of
the purchase order by the Portfolios. See "Valuation of Shares."
MINIMUM INVESTMENT AND ACCOUNT SIZES; CONVERSION FROM CLASS A TO CLASS B SHARES
For a Portfolio opened on or after January 2, 1996 (a "New Account"), the
minimum initial investment and minimum account size are $500,000 for Class A
shares and $100,000 minimum for Class B shares. Managed Accounts may purchase
Class A shares without being subject to a minimum initial investment or minimum
account size requirements for a Portfolio account. Officers of the Adviser and
its affiliates are subject to the minimums for a Portfolio account, except they
may purchase Class B shares subject to a minimum initial investment and minimum
account size of $5,000 for a Portfolio account.
If the value of a New Account containing Class A shares falls below $500,000
(but remains at or above $100,000) because of shareholder redemption(s), the
Fund will notify the shareholder, and if the account value remains below
$500,000 (but remains at or above $100,000) for a continuous 60-day period, the
Class A shares in such account will convert to Class B shares and will be
subject to the distribution fee and other features applicable to the Class B
shares. The Fund, however, will not convert Class A shares to Class B shares
based solely upon changes in the market that reduce the net asset value of
shares. Under current tax law, conversions between share classes are not a
taxable event to the shareholder.
Shares in a Portfolio account opened prior to January 2, 1996 (a "Pre-1996
Account") were designated Class A shares on January 2, 1996. Shares in a
Pre-1996 Account with a value of $100,000 or more on March 1, 1996 (a
"Grandfathered Class A Account") remained Class A shares regardless of account
size thereafter. Except for shares in a Managed Account, shares in a Pre-1996
Account with a value of less than $100,000 on March 1, 1996 (a "Grandfathered
Class B Account") converted to Class B shares on March 1, 1996. Grandfathered
Class A Accounts and Managed Accounts are not subject to conversion from Class A
shares to Class B shares.
Investors may also invest in the Fund by purchasing shares through a trust
department, broker, dealer, agent, financial planner, financial services firm or
investment adviser. An investor may be charged an additional service or
transaction fee by that institution. The minimum investment levels may be waived
at the discretion of the Adviser for (i) certain employees and customers of
Morgan Stanley or its affiliates and certain trust departments, brokers,
dealers, agents, financial planners, financial services firms, or investment
advisers that have entered into an agreement with Morgan Stanley or its
affiliates; and (ii) retirement and deferred compensation plans and trusts used
to fund such plans, including, but not limited to, those defined in Section
401(a), 403(b) or 457 of the Internal Revenue Code of 1986, as amended, and
"rabbi trusts". The Fund reserves the right to modify or terminate the
conversion features of the shares as stated above at any time upon 60-days'
notice to shareholders.
MINIMUM ACCOUNT SIZES AND INVOLUNTARY REDEMPTION OF SHARES
If the value of a New Account falls below $100,000 because of shareholder
redemption(s), the Fund will notify the shareholder, and if the account value
remains below $100,000 for a continuous 60-day period, the shares in such
account are subject to redemption by the Fund and, if redeemed, the net asset
value of such shares will be promptly paid to the shareholder. The Fund,
however, will not redeem shares based solely upon changes in the market that
reduce the net asset value of shares.
21
<PAGE>
For purposes of redemptions by the Fund, the foregoing minimum account size
requirements do not apply to New Accounts containing Class B shares held by
officers of the Adviser or its affiliates. However, if the value of such account
held by an officer of the Adviser or its affiliates falls below $5,000 because
of shareholder redemption(s), the Fund will notify the shareholder, and if the
account value remains $5,000 for a continuous 60-day period, the shares in such
account are subject to redemption by the Fund and, if redeemed, the net asset
value of such shares will be promptly paid to the shareholder.
Grandfathered Class A Accounts, Grandfathered Class B Accounts and Managed
Accounts are not subject to involuntary redemption.
The Fund reserves the right to modify or terminate the involuntary
redemption features of the shares as stated above at any time upon 60-days'
notice to shareholders.
CONVERSION FROM CLASS B TO CLASS A SHARES
If the value of Class B shares in a Portfolio account increases, whether due
to shareholder share purchases or market activity, to $500,000 or more, the
Class B shares will convert to Class A shares. Under current tax law, such
conversion is not a taxable event to the shareholder. Class A shares converted
from Class B shares are subject to the same minimum account size requirements
that are applicable to New Accounts containing Class A shares, as stated above.
The Fund reserves the right to modify or terminate this conversion feature at
any time upon 60-days' notice to shareholders.
INITIAL PURCHASES DIRECTLY FROM THE FUND
The Fund's determination of an investor's eligibility to purchase shares of
a given class will take precedence over the investor's selection of a class.
Assuming the investor is eligible for the class, the Fund will select the most
favorable class for the investor, if the investor has not done so.
1) BY CHECK. An account may be opened by completing and signing an Account
Registration Form and mailing it, together with a check ($500,000 minimum for
Class A shares of each Portfolio and $100,000 for Class B shares of each
Portfolio, with certain exceptions for Morgan Stanley employees and select
customers) payable to "Morgan Stanley Institutional Fund, Inc. -- [portfolio
name]," to:
Morgan Stanley Institutional Fund, Inc.
P.O. Box 2798
Boston, Massachusetts 02208-2798
Payment will be accepted only in U.S. dollars, unless prior approval for
payment by other currencies is given by the Fund. The Portfolio(s) to be
purchased should be designated on the Account Registration Form. For purchases
by check, the Fund is ordinarily credited with Federal Funds within one
business day. Thus, your purchase of shares by check is ordinarily credited to
your account at the net asset value per share of the relevant Portfolio
determined on the next business day after receipt.
22
<PAGE>
2) BY FEDERAL FUNDS WIRE. Purchases may be made by having your bank wire
Federal Funds to the Fund's bank account. In order to ensure prompt receipt
of your Federal Funds Wire, it is important that you follow these steps:
A. Telephone the Fund (toll free: 1-800-548-7786) and provide us with your
name, address, telephone number, Social Security or Tax Identification
Number, the portfolio(s) selected, the class selected, the amount being
wired, and by which bank. We will then provide you with a Fund account
number. (Investors with existing accounts should also notify the Fund prior
to wiring funds.)
B. Instruct your bank to wire the specified amount to the Fund's Wire
Concentration Bank Account (be sure to have your bank include the name of
the portfolio(s) selected, the class selected and the account number
assigned to you) as follows:
Chase Manhattan Bank, N.A.
One Manhattan Plaza
New York, NY 10081-1000
ABA #021000021
DDA #910-2-733293
Attn: Morgan Stanley Institutional Fund, Inc.
Ref: (Portfolio name, your account number, your account name)
Please call the Fund at 1-800-548-7786 prior to wiring funds.
C. Complete and sign the Account Registration Form and mail it to the address
shown thereon.
Purchase orders for shares of the Portfolios which are received prior to the
regular close of the NYSE (currently 4:00 p.m. Eastern Time) will be executed
at the price computed on the date of receipt as long as the Transfer Agent
receives payment by check or in Federal Funds prior to the regular close of
the NYSE on such day.
Federal Funds purchase orders will be accepted only on a day on which the Fund
and Chase (the "Custodian Bank") are open for business. Your bank may charge a
service fee for wiring Federal Funds.
3) BY BANK WIRE. The same procedure outlined under "By Federal Funds Wire"
above must be followed in purchasing shares by bank wire. However, money
transferred by bank wire may or may not be converted into Federal Funds the
same day, depending on the time the money is received and the bank handling
the wire. Prior to such conversion, an investor's money will not be invested.
Your bank may charge a service fee for wiring funds.
ADDITIONAL INVESTMENTS
You may add to your account at any time (minimum additional investment
$1,000 for each Portfolio, except for automatic reinvestment of dividends and
capital gains distributions for which there are no minimums) by purchasing
shares at net asset value by mailing a check to the Fund (payable to "Morgan
Stanley Institutional Fund, Inc. -- [portfolio name]") at the above address or
by wiring monies to the Custodian Bank as outlined above. It is very important
that your account name, portfolio name and the class selected be specified in
the letter or wire to assure proper crediting to your account. In order to help
to ensure that your wire orders are
23
<PAGE>
invested promptly, you are requested to notify one of the Fund's representatives
(toll free 1-800-548-7786) prior to sending the wire. Additional investments
will be applied to purchase additional shares in the same class held by a
shareholder in a Portfolio account.
OTHER PURCHASE INFORMATION
The purchase price of the Class A and Class B shares of each portfolio is
the net asset value next determined after the order is received. See "Valuation
of Shares." An order received prior to the close of the New York Stock Exchange
("NYSE"), which is currently 4:00 p.m. Eastern Time, will be executed at the
price computed on the date of receipt; an order received after the close of the
NYSE will be executed at the price computed on the next day the NYSE is open as
long as the Transfer Agent receives payment by check or in Federal Funds prior
to the regular close of the NYSE on such day.
Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends. The net asset value of Class B shares will generally be
lower than the net asset value of Class A shares as a result of the distribution
expense charged to Class B shares. It is expected, however, that the net asset
value per share of the two classes will tend to converge immediately after the
recording of dividends which will differ by approximately the amount of the
distribution expense accrual differential between the classes.
In the interest of economy and convenience, and because of the operating
procedures of the Fund, certificates representing shares of the Portfolios will
not be issued. All shares purchased are confirmed to you and credited to your
account on the Fund's books maintained by the Adviser or its agents. You will
have the same rights and ownership with respect to such shares as if
certificates had been issued.
To ensure that checks are collected by the Fund, withdrawals of investments
made by check are not presently permitted until payment for the purchase has
been received, which may take up to eight business days after the date of
purchase. As a condition of this offering, if a purchase is cancelled due to
nonpayment or because your check does not clear, you will be responsible for any
loss the Fund or its agents incur. If you are already a shareholder, the Fund
may redeem shares from your account(s) to reimburse the Fund or its agents for
any loss. In addition, you may be prohibited or restricted from making future
investments in the Fund.
Investors may also invest in the Fund by purchasing shares through the
Distributor. See "Purchase of Shares" in the Statement of Additional
Information.
EXCESSIVE TRADING
Frequent trades involving either substantial portfolio assets or a
substantial portion of your account or accounts controlled by you can disrupt
management of a portfolio and raise its expenses. Consequently, in the interest
of all the stockholders of each Portfolio and each Portfolio's performance, the
Fund may in its discretion bar a stockholder that engages in excessive trading
of shares of any class of a portfolio from further purchases of shares of the
Fund for an indefinite period. The Fund considers excessive trading to be more
than one purchase and sale involving shares of the same class of a portfolio of
the Fund within any 120-day period. As an example, exchanging shares of
portfolios of the Fund as follows amounts to excessive trading: exchanging Class
A shares of Portfolio A for Class A shares of Portfolio B, then exchanging Class
A shares of Portfolio B for Class A shares of Portfolio C and again exchanging
Class A shares of Portfolio C for Class A shares of Portfolio B within a 120-day
24
<PAGE>
period. Two types of transactions are exempt from these excessive trading
restrictions: (1) trades exclusively between money market portfolios; and (2)
trades done in connection with an asset allocation service, such as TFM
Accounts, managed or advised by MSAM and/or any of its affiliates.
REDEMPTION OF SHARES
You may withdraw all or any portion of the amount in your account by
redeeming shares at any time. Please note that purchases made by check are not
permitted to be redeemed until payment of the purchase has been collected, which
may take up to eight business days after purchase. The Fund will redeem Class A
shares or Class B shares of each Portfolio at the next determined net asset
value of shares to their applicable class. On days that both the NYSE and the
Custodian Bank are open for business, the net asset values per share of each of
the Portfolios is determined at the close of trading of the NYSE (currently 4:00
p.m. Eastern Time). Shares of each Portfolio may be redeemed by mail or
telephone. No charge is made for redemption. Any redemption proceeds may be more
or less than the purchase price of your shares depending on, among other
factors, the market value of the investment securities held by the Portfolio.
BY MAIL
Each Portfolio will redeem its Class A shares or Class B shares at the net
asset value determined on the date the request is received, if the request is
received in "good order" before the regular close of the NYSE. Your request
should be addressed to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798,
Boston, Massachusetts 02208-2798, except that deliveries by overnight courier
should be addressed to Morgan Stanley Institutional Fund, Inc., c/o Chase Global
Funds Services Company, 73 Tremont Street, Boston, Massachusetts 02108-3913.
"Good order" means that the request to redeem shares must include the
following documentation:
(a) A letter of instruction or a stock assignment specifying the class
and number of shares or dollar amount to be redeemed, signed by all
registered owners of the shares in the exact names in which they are
registered;
(b) Any required signature guarantees (see "Further Redemption
Information" below); and
(c) Other supporting legal documents, if required, in the case of
estates, trusts, guardianships, custodianships, corporations, pension and
profit-sharing plans and other organizations.
Shareholders who are uncertain of requirements for redemption should consult
with a Morgan Stanley Institutional Fund representative.
BY TELEPHONE
Provided you have previously elected the Telephone Redemption Option on the
Account Registration Form, you can request a redemption of your shares by
calling the Fund and requesting the redemption proceeds be mailed to you or
wired to your bank. Please contact one of Morgan Stanley Institutional Fund,
Inc.'s representatives for further details. In times of drastic market
conditions, the telephone redemption option may be difficult to implement. If
you experience difficulty in making a telephone redemption, your request may be
made by mail or overnight courier, and will be implemented at the net asset
value next determined after it is received. Redemption requests sent to the Fund
through overnight courier must be sent to Morgan Stanley Institutional Fund,
Inc., c/o Chase Global Funds Services Company, 73 Tremont Street, Boston,
Massachusetts
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02108-3913. The Fund and the Fund's transfer agent (the "Transfer Agent") will
employ reasonable procedures to confirm that instructions communicated by
telephone are genuine. These procedures include requiring the investor to
provide certain personal identification information at the time an account is
opened and prior to effecting each transaction requested by telephone. In
addition, all telephone transaction requests will be recorded and investors may
be required to provide additional telecopied written instructions regarding
transaction requests. Neither the Fund nor the Transfer Agent will be
responsible for any loss, liability, cost or expense for following instructions
received by telephone that either of them reasonably believes to be genuine.
To change the name of the commercial bank or account designated to receive
redemption proceeds, a written request must be sent to the Fund at the address
above. Requests to change the bank or account must be signed by each shareholder
and each signature must be guaranteed.
FURTHER REDEMPTION INFORMATION
Normally the Fund will make payment for all shares redeemed under this
procedure within one business day of receipt of the request, but in no event
will payment be made more than seven days after receipt of a redemption request
in good order. However, payments to investors redeeming shares which were
purchased by check will not be made until payment for the purchase has been
collected, which may take up to eight days after the date of purchase. The Fund
may suspend the right of redemption or postpone the date upon which redemptions
are effected at times when the NYSE is closed, or under any emergency
circumstances as determined by the Securities and Exchange Commission (the
"Commission").
If the Board of Directors determines that it would be detrimental to the
best interests of the remaining shareholders of a Portfolio to make payment
wholly or partly in cash, the Fund may pay the redemption proceeds in whole or
in part by a distribution in-kind of securities held by a Portfolio in lieu of
cash in conformity with applicable rules of the Commission.
Distributions-in-kind will be made in readily marketable securities. Investors
may incur brokerage charges on the sale of portfolio securities so received in
payment of redemptions.
To protect your account, the Fund and its agents from fraud, signature
guarantees are required for certain redemptions to verify the identity of the
person who has authorized a redemption from your account. Please contact the
Fund for further information. See "Redemption of Shares" in the Statement of
Additional Information.
SHAREHOLDER SERVICES
EXCHANGE FEATURES
You may exchange shares that you own in each Portfolio for shares of any
other available portfolio of the Fund (other than the International Equity
Portfolio, which is closed to new investors). In exchanging for shares of a
portfolio with more than one class, the class of shares you receive in the
exchange will be determined in the same manner as any other purchase of shares
and will not be based on the class of shares surrendered for the exchange.
Consequently, the same minimum initial investment and minimum account size for
determining the class of shares received in the exchange will apply. See
"Purchase of Shares." Shares of the portfolios may be exchanged by mail or
telephone. The privilege to exchange shares by telephone is automatic and made
available without shareholder election. Before you make an exchange, you should
read the prospectus of the portfolio(s) in which you seek to invest. Because an
exchange transaction is treated as a redemption followed by a purchase, an
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<PAGE>
exchange would be considered a taxable event for shareholders subject to tax.
The exchange privilege is only available with respect to portfolios that are
registered for sale in a shareholder's state of residence. The exchange
privilege may be modified or terminated by the Fund at any time upon 60-days'
notice to shareholders.
BY MAIL
In order to exchange shares by mail, you should include in the exchange
request the name, class of shares and account number of your current Portfolio,
the names of the portfolio(s) and class(es) of shares into which you intend to
exchange shares, and the signatures of all registered account holders. Send the
exchange request to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798,
Boston, Massachusetts 02208-2798.
BY TELEPHONE
When exchanging shares by telephone, have ready the name, class of shares
and account number of the current Portfolio, the name(s) of the portfolio(s) and
class(es) of shares into which you intend to exchange shares, your Social
Security number or Tax I.D. number, and your account address. Requests for
telephone exchanges received prior to 4:00 p.m. (Eastern Time) are processed at
the close of business that same day based on the net asset value of the class of
the portfolios involved in the exchange of shares at the close of business.
Requests received after 4:00 p.m. are processed the next business day based on
the net asset value determined at the close of business on such day. For
additional information regarding responsibility for the authenticity of
telephoned instructions, see "Redemption of Shares -- By Telephone" above.
TRANSFER OF REGISTRATION
You may transfer the registration of any of your Fund shares to another
person by writing to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798,
Boston, Massachusetts 02208-2798. As in the case of redemptions, the written
request must be received in good order before any transfer can be made.
Transferring the registration of shares may affect the eligibility of your
account for a given class of a Portfolio's shares and may result in involuntary
conversion or redemption of your shares. See "Purchase of Shares" above.
VALUATION OF SHARES
The net asset value per share of a class of shares of each of the Portfolios
is determined by dividing the total market value of the Portfolio's investments
and other assets attributable to such a class, less any liabilities attributable
to such a class, by the total number of outstanding shares of such class of the
Portfolio. Net asset value is calculated separately for each class of the
Portfolio. Net asset value per share is determined as of the regular close of
the NYSE on each day that the NYSE is open for business. Price information on
listed securities is taken from the exchange where the security is primarily
traded. Securities listed on a U.S. securities exchange for which market
quotations are available are valued at the last quoted sale price on the day the
valuation is made. Securities listed on a foreign exchange are valued at their
closing price. Unlisted securities and listed securities not traded on the
valuation date for which market quotations are not readily available are valued
at a price that is considered to best represent fair value within a range not
exceeding the current asked price nor less than the current bid price. The
current bid and asked prices are determined based on the bid and asked prices
quoted on such valuation date by reputable brokers.
Bonds and other fixed income securities are valued according to the broadest
and most representative market, which will ordinarily be the over-the-counter
market. Net asset value includes interest on fixed income securities, which is
accrued daily. In addition, bonds and other fixed income securities may be
valued on the
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<PAGE>
basis of prices provided by a pricing service when such prices are believed to
reflect the fair market value of such securities. The prices provided by a
pricing service are determined without regard to bid or last sale prices, but
take into account institutional size trading in similar groups of securities and
any developments related to the specific securities. Securities not priced in
this manner are valued at the most recently quoted bid price, or, when
securities exchange valuations are used, at the latest quoted sale price on the
day of valuation. If there is no such reported sale, the latest quoted bid price
will be used. Securities purchased with remaining maturities of 60 days or less
are valued at amortized cost, if it approximates market value. In the event that
amortized cost does not approximate market value, market prices as determined
above will be used.
The value of other assets and securities for which no quotations are readily
available (including restricted securities and unlisted foreign securities) and
those securities the prices for which it is inappropriate to determine in
accordance with the above-stated procedures are determined in good faith at fair
value using methods determined by the Board of Directors. For purposes of
calculating net asset value per share, all assets and liabilities initially
expressed in foreign currencies will be translated into U.S. dollars at the mean
of the bid price and asked price of such currencies against the U.S. dollar last
quoted by any major bank.
Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends for the class. Dividends will differ by approximately the
amount of the distribution expense accrual differential among the classes. The
net asset value of Class B shares will generally be lower than the net asset
value of the Class A shares as a result of the distribution expense charged to
Class B shares.
PERFORMANCE INFORMATION
The Fund may from time to time advertise total return for each class of the
Portfolios. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT INTENDED
TO INDICATE FUTURE PERFORMANCE. The "total return" shows what an investment in a
class of the Portfolio would have earned over a specified period of time (such
as one, five or ten years), assuming that all distributions and dividends by the
Portfolio were reinvested in the same class on the reinvestment dates during the
period. Total return does not take into account any federal or state income
taxes that may be payable on dividends and distributions or upon redemption. The
Fund may also include comparative performance information in advertising or
marketing the Portfolios' shares. Such performance information may include data
from Lipper Analytical Services, Inc., other industry publications, business
periodicals, rating services and market indices.
The performance figures for Class B shares will generally be lower than
those for Class A shares because of the distribution fee charged to Class B
shares.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All income dividends and capital gains distributions for a class of shares
will automatically be reinvested in additional shares of such class at net asset
value, except that, upon written notice to the Fund or by checking off the
appropriate box in the Distribution Option Section on the Account Registration
Form, a shareholder may elect to receive income dividends and capital gains
distributions in cash. Each Portfolio expects to distribute substantially all of
its net investment income in the form of quarterly dividends. Net realized
gains, if any, after reduction for any available tax loss carryforwards will
also be distributed annually. Confirmations of the purchase
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<PAGE>
of shares of the Portfolio through the automatic reinvestment of income
dividends and capital gains distributions will be provided, pursuant to Rule
10b-10(b) under the Securities Exchange Act of 1934, as amended, on the next
monthly client statement following such purchase of shares. Consequently,
confirmations of such purchases will not be provided at the time of completion
of such purchases as might otherwise be required by Rule 10b-10.
Undistributed net investment income is included in a Portfolio's net assets
for the purpose of calculating net asset value per share. Therefore, on the
"ex-dividend" date, the net asset value per share excludes the dividend (i.e.,
is reduced by the per share amount of the dividend). Dividends paid shortly
after the purchase of shares by an investor, although in effect a return of
capital, are taxable to shareholders subject to tax.
Because of the distribution fee and any other expenses that may be
attributable to the Class B shares, the net income attributable to and the
dividends payable on Class B shares will be lower than the net income
attributable to and the dividends payable on Class A shares. As a result, the
net asset value per share of the classes of the Portfolios will differ at times.
Expenses of the Portfolios allocated to a particular class of shares thereof
will be borne on a pro rata basis by each outstanding share of that class.
TAXES
The following summary of certain federal income tax consequences is based on
current tax laws and regulations, which may be changed by legislative, judicial,
or administrative action.
No attempt has been made to present a detailed explanation of the federal,
state, or local income tax treatment of a Portfolio or its shareholders.
Accordingly, shareholders are urged to consult their tax advisors regarding
specific questions as to federal, state and local income taxes.
Each Portfolio is treated as a separate entity for federal income tax
purposes and is not combined with the Fund's other portfolios. Each Portfolio
intends to qualify for the special tax treatment afforded regulated investment
companies under Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"), so that the Portfolio will be relieved of federal income tax on
that part of its net investment income and net capital gain that is distributed
to shareholders.
Each Portfolio distributes substantially all of its net investment income
(including, for this purpose, net short-term capital gain) to shareholders.
Dividends from a Portfolio's net investment income are taxable to shareholders
as ordinary income, whether received in cash or in additional shares. Such
dividends paid by a Portfolio will generally qualify for the 70%
dividends-received deduction for corporate shareholders to the extent of the
aggregate qualifying dividend income received by the Portfolio from U.S.
corporations. Distributions of net capital gain (the excess of net long-term
capital gain over net short-term capital loss) are taxable to shareholders as
long-term capital gain, regardless of how long shareholders have held their
shares. Each Portfolio sends reports annually to shareholders of the federal
income tax status of all distributions made during the preceding year.
Each Portfolio intends to make sufficient distributions or deemed
distributions of its ordinary income and capital gain net income (the excess of
short-term and long-term capital gains over short-term and long-term capital
losses), including any available capital loss carry-forwards, prior to the end
of each calendar year to avoid liability for federal excise tax.
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<PAGE>
Dividends and other distributions declared by a Portfolio in October,
November or December of any year and payable to shareholders of record on a date
in such month will be deemed to have been paid by the Portfolio and received by
the shareholders on December 31 of that year if the distributions are paid by
the Portfolio at any time during the following January.
The sale, exchange or redemption of shares may result in taxable gain or
loss to the sellling, exchanging or redeeming shareholder, depending upon
whether the fair market value of the redemption proceeds exceeds or is less than
the shareholder's adjusted basis in the redeemed, exchanged or sold shares. If
capital gain distributions have been made with respect to shares that are sold
at a loss after being held for six months or less, then the loss is treated as a
long-term capital loss to the extent of the capital gain distributions.
The conversion of Class A shares to Class B shares should not be a taxable
event to the shareholder.
Shareholders are urged to consult with their tax advisors concerning the
application of state and local income taxes to investments in a Portfolio, which
may differ from the federal income tax consequences described above.
THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED HEREIN FOR GENERAL
INFORMATION ONLY. PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS
WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN A PORTFOLIO.
PORTFOLIO TRANSACTIONS
The Investment Advisory Agreement authorizes the Adviser to select the
brokers or dealers that will execute the purchases and sales of investment
securities for each of the Fund's Portfolios and directs the Adviser to use its
best efforts to obtain the best available price and most favorable execution
with respect to all transactions for the Portfolios. The Fund has authorized the
Adviser to pay higher commissions in recognition of brokerage services which, in
the opinion of the Adviser, are necessary for the achievement of better
execution, provided the Adviser believes this to be in the best interest of the
Fund.
Since shares of the Portfolios are not marketed through intermediary brokers
or dealers, it is not the Fund's practice to allocate brokerage or principal
business on the basis of sales of shares which may be made through such firms.
However, the Adviser may place portfolio orders with qualified broker-dealers
who recommend the Fund's Portfolios or who act as agents in the purchase of
shares of the Fund's Portfolios for their clients.
In purchasing and selling securities for the Portfolios, it is the Fund's
policy to seek to obtain quality execution at the most favorable prices, through
responsible broker-dealers. In selecting broker-dealers to execute the
securities transactions for the Portfolios, consideration will be given to such
factors as the price of the security, the rate of the commission, the size and
difficulty of the order, the reliability, integrity, financial condition,
general execution and operational capabilities of competing broker-dealers, and
the brokerage and research services which they provide to the Fund. Some
securities considered for investment by a Portfolio may also be appropriate for
other clients served by the Adviser. If a purchase or sale of securities
consistent with the investment policies of a portfolio and one or more of these
other clients served by the Adviser is considered at or about the same time,
transactions in such securities will be allocated among the portfolios and such
other clients
30
<PAGE>
in a manner deemed fair and reasonable by the Adviser. Although there is no
specified formula for allocating such transactions, the various allocation
methods used by the Adviser, and the results of such allocations, are subject to
periodic review by the Fund's Board of Directors.
Subject to the overriding objective of obtaining the best possible execution
of orders, the Adviser may allocate a portion of the Portfolio's brokerage
transactions to Morgan Stanley or broker affiliates of Morgan Stanley. In order
for Morgan Stanley or its affiliates to effect any portfolio transactions for
the Fund, the commissions, fees or other remuneration received by Morgan Stanley
or such affiliates must be reasonable and fair compared to the commissions, fees
or other remuneration paid to other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time. Furthermore, the Board
of Directors of the Fund, including a majority of the Directors who are not
"interested persons," as defined in the Investment Company Act of 1940, as
amended (the "1940 Act") have adopted procedures which are reasonably designed
to provide that any commissions, fees or other remuneration paid to Morgan
Stanley or such affiliates be consistent with the foregoing standard.
Portfolio securities will not be purchased from or through, or sold to or
through, the Adviser or Morgan Stanley or any "affiliated persons," as defined
in the 1940 Act, of Morgan Stanley when such entities are acting as principals,
except to the extent permitted by law.
Although none of the Portfolios intend to invest for short-term trading
purposes, investment securities may be sold from time to time without regard to
the length of time they have been held. For each Portfolio, it is anticipated
that, under normal circumstances, the annual portfolio turnover rate will not
exceed 100%. High portfolio turnover involves correspondingly greater
transaction costs which will be borne directly by the respective Portfolio. In
addition, high portfolio turnover may result in more capital gains which would
be taxable to the shareholders of the respective Portfolio. The tables set forth
in "Financial Highlights" present the Portfolios' historical turnover rates.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
The Fund was organized as a Maryland corporation on June 16, 1988. The
Articles of Incorporation, as amended and restated, permit the Fund to issue up
to 34 billion shares of common stock, with $.001 par value per share. Pursuant
to the Fund's Articles of Incorporation, the Board of Directors may increase the
number of shares the Fund is authorized to issue without the approval of the
shareholders of the Fund. Subject to the notice period to shareholders with
respect to shares held by shareholders, the Board of Directors has the power to
designate one or more classes of shares of common stock and to classify and
reclassify any unissued shares with respect to such classes. The shares of
common stock of each portfolio are currently classified into two classes, the
Class A shares and the Class B shares, except for the International Small Cap,
Money Market and Municipal Money Market Portfolios, which only offer Class A
shares.
The shares of each Portfolio, when issued, will be fully paid,
nonassessable, fully transferable and redeemable at the option of the holder.
The shares have no preference as to conversion, exchange, dividends, retirement
or other features and have no pre-emptive rights. The shares of each Portfolio
have non-cumulative voting rights, which means that the holders of more than 50%
of the shares voting for the election of Directors can elect 100% of the
Directors if they choose to do so. Persons or organizations owning 25% or more
of the outstanding
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<PAGE>
shares of a Portfolio may be presumed to "control" (as that term is defined in
the 1940 Act) the Portfolio. Under Maryland law, the Fund is not required to
hold an annual meeting of its shareholders unless required to do so under the
1940 Act.
REPORTS TO SHAREHOLDERS
The transfer agent of the Fund will send to its shareholders annual and
semiannual reports; the financial statements appearing in annual reports are
audited by independent accountants. Monthly unaudited portfolio data are also
available from the Fund upon request.
In addition, the Adviser or its agent, as Transfer Agent, will send to each
shareholder having an account directly with the Fund a monthly statement showing
transactions in the account, the total number of shares owned, and any dividends
or distributions paid.
CUSTODIAN
As of September 1, 1995, domestic securities and cash are held by Chase,
which replaced U.S. Trust as the Fund's domestic custodian. Chase is not an
affiliate of the Adviser or the Distributor. Morgan Stanley Trust Company,
Brooklyn, New York ("MSTC"), an affiliate of the Adviser and the Distributor,
acts as the Fund's custodian for foreign assets held outside the United States
and employs subcustodians approved by the Board of Directors of the Fund in
accordance with regulations of the Securities and Exchange Commission for the
purpose of providing custodial services for such assets. MSTC may also hold
certain domestic assets for the Fund. For more information on the custodians,
see "General Information -- Custody Arrangements" in the Statement of Additional
Information.
DIVIDEND DISBURSING AND TRANSFER AGENT
Chase Global Funds Services Company, 73 Tremont Street, Boston,
Massachusetts 02108-3913, acts as Dividend Disbursing and Transfer Agent for the
Fund.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP serves as independent accountants for the Fund and
audits its annual financial statements.
LITIGATION
The Fund is not involved in any litigation.
32
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<TABLE>
<CAPTION>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
SMALL CAP VALUE EQUITY, VALUE EQUITY AND BALANCED PORTFOLIOS
P.O. BOX 2798, BOSTON, MA 02208-2798
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ACCOUNT REGISTRATION FORM
- ---------------------------------------------------------------------------------------------------------------
<S> <C>
ACCOUNT INFORMATION If you need assistance in filling out this form
Fill in where applicable for the Morgan Stanley Institutional Fund, please
contact your Morgan Stanley representative or call
us toll free 1-(800)-548-7786. Please print all
items except signature, and mail to the Fund at the
address above.
- ---------------------------------------------------------------------------------------------------------------
A) REGISTRATION
1. INDIVIDUAL 1. / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
First Name Initial Last Name
2. JOINT TENANTS 2. / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
(RIGHTS OF First Name Initial Last Name
SURVIVORSHIP / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
PRESUMED UNLESS First Name Initial Last Name
TENANCY IN COMMON
IS INDICATED)
- ---------------------------------------------------------------------------------------------------------------
3. CORPORATIONS, 3. / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
TRUSTS AND OTHERS
Please call the / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
Fund for additional
documents that may / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
be required to set
up account and to
authorize transactions.
Type of / / INCORPORATED / / UNINCORPORATED / / PARTNERSHIP / / UNIFORM GIFT/TRANSFER TO MINOR
Registration: ASSOCIATION (ONLY ONE CUSTODIAN AND MINOR PERMITTED)
/ / TRUST __________________________________ / / OTHER (Specify) ______________________________
- ---------------------------------------------------------------------------------------------------------------
B) MAILING ADDRESS Street or P.O. Box / / / / / / / / / / / / / / / / / / / / / / / / / / / /
Please fill in
completely, including City / / / / / / / / / / / / / State / / / Zip / / / / / /-/ / / / / / / /
telephone number(s).
Home Business
Telephone No./ / / /-/ / / /-/ / / / / Telephone No./ / / /-/ / / /-/ / / /
/ / United States / / Resident / /Non-Resident Alien:
Citizen Alien Indicate Country of Residence _________
- ---------------------------------------------------------------------------------------------------------------
C) TAXPAYER PART 1. Enter your Taxpayer IMPORTANT TAX INFORMATION
IDENTIFICATION Identification Number. For most You (as a payee) are required by
NUMBER individual taxpayers, this is your law to provide us (as payer) with
If the account is in Social Security Number. your correct Taxpayer Identification
more than one name, TAXPAYER IDENTIFICATION NUMBER Number. Accounts that have a missing
CIRCLE THE NAME OF THE / / / /-/ / / / / / / / / or incorrect Taxpayer Identification
PERSON WHOSE TAXPAYER OR Number will be subject to backup
IDENTIFICATION NUMBER SOCIAL SECURITY NUMBER withholding at a 31% rate on dividends,
IS PROVIDED IN SECTION / / / /-/ / /-/ / / / / distributions and other payments.
A) ABOVE. If no name PART 2. BACKUP WITHHOLDING If you have not provided us with
is circled, the number / / Check this box if you are your correct taxpayer identification
will be considered to be NOT subject to Backup number, you may be subject to
that of the last name Withholding under the a $50 penalty imposed by the Internal
listed. For Custodian provisions of Section Revenue Service.
account of a minor 3406(a)(1)(C) of the Internal Backup withholding is not an
(Uniform Gift/Transfer Revenue Code. additional tax; the tax liability of
to Minor Act), give the persons subject to backup withholding
Social Security Number will be reduced by the amount of tax
of the minor. withheld. If withholding results in
an overpayment of taxes, a refund
may be obtained. You may be notified
that you are subject to backup
withholding under Section 3406(a)(1)(C)
of the Internal Revenue Code because you
have underreported interest or dividends
or you were required to but failed to
file a return which would have included a
reportable interest or dividend payment. IF
YOU HAVE NOT BEEN SO NOTIFIED, CHECK THE
BOX IN PART 2 AT LEFT.
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D) PORTFOLIO AND For Purchase of the following Portfolio(s):
CLASS SELECTION Small Cap Value Equity Portfolio / / Class A Shares $____ / / Class B Shares $____
(Class A shares Value Equity Portfolio / / Class A Shares $____ / / Class B Shares $____
minimum $500,000 Balanced Portfolio / / Class A Shares $____ / / Class B Shares $____
for each Portfolio Total Initial Investment $_____________
and Class B shares
minimum $100,000 for
each Portfolio).
Please indicate
Portfolio, class and
amount.
- ---------------------------------------------------------------------------------------------------------------
E) METHOD OF Payment by:
INVESTMENT / / Check (MAKE CHECK PAYABLE TO MORGAN STANLEY INSTITUTIONAL FUND, INC.--PORTFOLIO NAME)
Please
indicate
manner of / / Exchange $____________ From________________ / / / / / / / / / / /-/ /
payment. Name of Portfolio Account No.
/ / Account previously established by:
/ / Phone exchange / / Wire on___________________ / / / / / / / / / / / /-/ /
Date Account No. (Check
(Previously assigned by the Fund) Digit)
<PAGE>
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F) DISTRIBUTION Income dividends and capital gains distributions (if any) will
OPTION be reinvested in additional shares unless either box below is
checked.
/ / Income dividends to be paid in cash, capital
gains distributions (if any) in shares.
/ / Income dividends and capital gains distributions
(if any) to be paid in cash.
- ---------------------------------------------------------------------------------------------------------------
G) TELEPHONE / / I/we hereby authorize the Fund and its ______________________ ________________
REDEMPTION agents to honor any telephone requests Name of COMMERCIAL Bank Bank Account No.
Please select at time of to wire redemption proceeds to the (Not Savings Bank)
initial application if you commercial bank indicated at right and/or
wish to redeem shares by mail redemption proceeds to the name and ________________
telephone. A SIGNATURE address in which my/our fund account is Bank ABA No.
GUARANTEE IS REQUIRED IF registered if such requests are believed
BANK ACCOUNT IS NOT to be authentic. _________________________________________________
REGISTERED IDENTICALLY TO The Fund and the Fund's Transfer Agent will Name(s) in which your BANK Account is Established
YOUR FUND ACCOUNT. employ reasonable procedures to confirm that
instructions communicated by telephone are _________________________________________________
TELEPHONE REQUESTS FOR genuine. These procedures include requiring Bank's Street Address
REDEMPTIONS WILL NOT BE the investor to provide certain personal
HONORED UNLESS THE BOX IS identification information at the time an _________________________________________________
CHECKED. account is opened and prior to effecting each City State Zip
transaction requested by telephone. In addition,
all telephone transaction requests will be recorded
and investors may be required to provide additional
telecopied written instructions of transaction
requests. Neither the Fund nor the Transfer Agent will
be responsible for any loss, liability, cost or expenses
for following instructions received by telephone that
it reasonably believes to be genuine.
- ---------------------------------------------------------------------------------------------------------------
H) INTERESTED PARTY
OPTION
In addition to the account _________________________________________________________________
statement sent to my/our Name
registered address, I/we _________________________________________________________________
hereby authorize the fund
to mail duplicate _________________________________________________________________
statements to the name and Address
address provided at right.
_________________________________________________________________
City State Zip Code
- ---------------------------------------------------------------------------------------------------------------
I) DEALER
INFORMATION _______________________ _______________________________ ___________
Representative Name Representative No. Branch No.
- ---------------------------------------------------------------------------------------------------------------
J) SIGNATURE OF The undersigned certify(ies) that I/we have full authority and legal
ALL HOLDERS capacity to purchase and redeem shares of the Fund and affirm that I/we
AND TAXPAYER have received a current Prospectus of the Morgan Stanley Institutional
CERTIFICATION Fund, Inc. and agree to be bound by its terms. UNDER THE PENALTIES OF
Sign Here > PERJURY, I/WE CERTIFY THAT THE INFORMATION PROVIDED IN SECTION C)
ABOVE IS TRUE, CORRECT AND COMPLETE.
(X) (X)
__________________________________ ______________________________________
Signature Date Signature Date
(X) (X)
__________________________________ ______________________________________
Signature Date Signature Date
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
(This page has been left blank intentionally.)
<PAGE>
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND OR THE DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER BY THE FUND OR THE DISTRIBUTOR TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION.
--------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
PAGE
----
Fund Expenses..................................... 2
Financial Highlights.............................. 4
Prospectus Summary................................ 8
Investment Objectives and Policies................ 12
Additional Investment Information................. 14
Investment Limitations............................ 17
Management of the Fund............................ 18
Purchase of Shares................................ 21
Redemption of Shares.............................. 25
Shareholder Services.............................. 26
Valuation of Shares............................... 27
Performance Information........................... 28
Dividends and Capital Gains Distributions......... 28
Taxes............................................. 29
Portfolio Transactions............................ 30
General Information............................... 31
Account Registration Form
</TABLE>
SMALL CAP VALUE EQUITY PORTFOLIO
VALUE EQUITY PORTFOLIO
BALANCED PORTFOLIO
PORTFOLIOS OF THE
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
Common Stock
($.001 PAR VALUE)
-------------
PROSPECTUS
-------------
Investment Adviser
Morgan Stanley
Asset Management Inc.
Distributor
Morgan Stanley & Co.
Incorporated
- ---------------------------------
- ---------------------------------
- ---------------------------------
- ---------------------------------
<PAGE>
(This page has been left blank intentionally.)
<PAGE>
- --------------------------------------------------------------------------------
P R O S P E C T U S
----------------------------------------------------------------------
ACTIVE COUNTRY ALLOCATION PORTFOLIO
A PORTFOLIO OF THE
MORGAN STANLEY INSTITUTIONAL FUND, INC.
P.O. BOX 2798, BOSTON, MASSACHUSETTS 02208-2798
FOR INFORMATION CALL 1-800-548-7786
----------------
Morgan Stanley Institutional Fund, Inc. (the "Fund") is a no-load, open-end
management investment company, or mutual fund, which offers redeemable shares in
a series of diversified and non-diversified investment portfolios
("portfolios"). The Fund currently consists of twenty-eight portfolios
representing a broad range of investment choices. The Fund is designed to
provide clients with attractive alternatives for meeting their investment needs.
This prospectus (the "Prospectus") pertains to the Class A and the Class B
shares of the Active Country Allocation Portfolio (the "Portfolio"). On January
2, 1996, the Portfolio began offering two classes of shares, the Class A shares
and the Class B shares, except for the Money Market, Municipal Money Market and
International Small Cap Portfolios which only offer Class A shares. All shares
of the Portfolio owned prior to January 2, 1996 were redesignated Class A shares
on January 2, 1996. The Class A and Class B shares currently offered by the
Portfolio have different minimum investment requirements and fund expenses.
Shares of the portfolios are offered with no sales charge or exchange or
redemption fee (with the exception of the International Small Cap Portfolio).
The ACTIVE COUNTRY ALLOCATION PORTFOLIO seeks long-term capital appreciation
by investing in accordance with country weightings determined by the Adviser in
equity securities of non-U.S. issuers which, in the aggregate, replicate broad
country indices.
The Fund is designed to meet the investment needs of discerning investors
who place a premium on quality and personal service. With Morgan Stanley Asset
Management Inc. as Adviser and Administrator (the "Adviser" and the
"Administrator"), and with Morgan Stanley & Co. Incorporated ("Morgan Stanley")
as Distributor, the Fund makes available to institutional and high net worth
individual investors a series of portfolios which benefit from the investment
expertise and commitment to excellence associated with Morgan Stanley and its
affiliates.
This Prospectus is designed to set forth concisely the information about the
Fund that a prospective investor should know before investing and it should be
retained for future reference. The Fund offers additional portfolios which are
described in other prospectuses and under "Prospectus Summary" below. The Fund
currently offers the following portfolios: (i) GLOBAL AND INTERNATIONAL EQUITY
- -- Active Country Allocation, Asian Equity, Emerging Markets, European Equity,
Global Equity, Gold, International Equity, International Magnum, International
Small Cap, Japanese Equity and Latin American Portfolios; (ii) U.S. EQUITY --
Aggressive Equity, Emerging Growth, Equity Growth, MicroCap, Small Cap Value
Equity, U.S. Real Estate and Value Equity Portfolios; (iii) EQUITY AND FIXED
INCOME -- Balanced Portfolio; (iv) FIXED INCOME -- Emerging Markets Debt, Fixed
Income, Global Fixed Income, High Yield, Mortgage-Backed Securities and
Municipal Bond Portfolios; and (v) MONEY MARKET -- Money Market and Municipal
Money Market Portfolios. Additional information about the Fund is contained in a
"Statement of Additional Information," dated May 1, 1996, which is incorporated
herein by reference. The Statement of Additional Information and the
prospectuses pertaining to the other portfolios of the Fund are available upon
request and without charge by writing or calling the Fund at the address and
telephone number set forth above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1996.
<PAGE>
FUND EXPENSES
The following table illustrates the expenses and fees that a shareholder of
the Active Country Allocation Portfolio will incur:
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
- ------------------------------------------------------------------------------------------
<S> <C>
Maximum Sales Load Imposed on Purchases
Class A................................................................................. None
Class B................................................................................. None
Maximum Sales Load Imposed on Reinvested Dividends
Class A................................................................................. None
Class B................................................................................. None
Deferred Sales Load
Class A................................................................................. None
Class B................................................................................. None
Redemption Fees
Class A................................................................................. None
Class B................................................................................. None
Exchange Fees
Class A................................................................................. None
Class B................................................................................. None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------------------------------------------------------------------
<S> <C>
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fee (Net of Fee Waiver)*
Class A................................................................................. 0.27%
Class B................................................................................. 0.27%
12b-1 Fees
Class A................................................................................. None
Class B................................................................................. 0.25%
Other Expenses
Class A................................................................................. 0.53%
Class B................................................................................. 0.53%
-----------
Total Operating Expenses (Net of Fee Waivers)*
Class A................................................................................. 0.80%
Class B................................................................................. 1.05%
-----------
-----------
</TABLE>
- ------------------------
*The Adviser has agreed to waive its management fees and/or to reimburse the
Portfolio, if necessary, if such fees would cause the Portfolio's total annual
operating expenses, as a percentage of average daily net assets, to exceed the
percentages set forth in the table above. Absent the fee waiver, the management
fee would be 0.65%. Absent the fee waiver and/or expense reimbursement, the
Portfolio's total operating expenses would be 1.18% of the average daily net
assets of the Class A shares and 1.43% of the average daily net assets of the
Class B shares. As a result of this reduction, the Management Fee stated above
is lower than the contractual fee stated under "Management of the Fund." The
Adviser reserves the right to terminate any of its fee waivers and/or expense
reimbursements at any time in its sole discretion. For further information on
Fund expenses, see "Management of the Fund."
2
<PAGE>
The purpose of the table above is to assist the investor in understanding
the various expenses that an investor in the Portfolio will bear directly or
indirectly. The Class A expenses and fees for the Portfolio are based on actual
figures for the fiscal year ended December 31, 1995. The Class B expenses and
fees for the Portfolio are based on estimates, assuming that the average daily
net assets of the Class B shares of the Portfolio will be $50,000,000. "Other
Expenses" include Board of Directors' fees and expenses, amortization of
organizational costs, filing fees, professional fees and costs for shareholder
reports. Due to the continuous nature of Rule 12b-1 fees, long term Class B
shareholders may pay more than the equivalent of the maximum front-end sales
charges otherwise permitted by the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. ("NASD").
The following example illustrates the expenses that you would pay on a
$1,000 investment assuming (1) a 5% annual rate of return and (2) redemption at
the end of each time period. As noted in the table above, the Fund charges no
redemption fees of any kind. The following example is based on the total
operating expenses of the Portfolio after fee waivers.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Active Country Allocation Portfolio
Class A.......................................................... $ 8 $ 26 $ 44 $ 99
Class B.......................................................... 11 33 58 128
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
The Fund intends to comply with all state laws that restrict investment
company expenses. Currently, the most restrictive state law requires that the
aggregate annual expenses of an investment company shall not exceed two and
one-half percent (2 1/2%) of the first $30 million of average net assets, two
percent (2%) of the next $70 million of average net assets, and one and one-half
percent (1 1/2%) of the remaining net assets of such investment company.
The Adviser has agreed to a reduction in the amounts payable to it, and to
reimburse the Portfolio, if necessary, if in any fiscal year the sum of the
Portfolio's expenses exceeds the limit set by applicable state law.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following table provides financial highlights for the Class A shares of
the Portfolio for each of the periods presented. The audited financial
highlights for the Class A shares for the fiscal year ended December 31, 1995
are part of the Fund's financial statements which appear in the Fund's December
31, 1995 Annual Report to Shareholders and which are included in the Fund's
Statement of Additional Information. The Portfolio's financial highlights for
each of the periods presented have been audited by Price Waterhouse LLP, whose
unqualified report thereon is also included in the Statement of Additional
Information. Additional performance information for the Class A shares is
included in the Annual Report. The Annual Report and the financial statements
therein, along with the Statement of Additional Information, are available at no
cost from the Fund at the address and telephone number noted on the cover page
of this Prospectus. Financial highlights are not available for the new Class B
shares since they were not offered as of December 31, 1995. Subsequent to
October 31, 1992 (the Fund's prior fiscal year end), the Fund changed its fiscal
year end to December 31. The following information should be read in conjunction
with the financial statements and notes thereto.
4
<PAGE>
ACTIVE COUNTRY ALLOCATION PORTFOLIO
<TABLE>
<CAPTION>
JANUARY 17,
1992* TWO MONTHS
TO OCTOBER ENDED
31, DECEMBER 31, YEARS ENDED DECEMBER 31,
1992 1992 1993 1994 1995
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD............................ $ 10.00 $ 9.37 $ 9.59 $ 12.21 $ 11.65
------------- ------------- ------------- ------------- -------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1)........ 0.11 0.02 0.13 0.19 0.17
Net Realized and Unrealized Gain/
(Loss) on Investments........... (0.74) 0.20 2.75 (0.25) 1.00
------------- ------------- ------------- ------------- -------------
Total from Investment
Operations...................... (0.63) 0.22 2.88 (0.06) 1.17
------------- ------------- ------------- ------------- -------------
DISTRIBUTIONS
Net Investment Income............ -- -- (0.09) (0.14) (0.25)
In Excess of Net Investment
Income.......................... -- -- (0.08) -- (0.10)
Net Realized Gain................ -- -- -- (0.36) (0.84)
In Excess of Net Realized Gain... -- -- (0.09) -- --
------------- ------------- ------------- ------------- -------------
Total Distributions.............. -- -- (0.26) (0.50) (1.19)
------------- ------------- ------------- ------------- -------------
NET ASSET VALUE, END OF PERIOD..... $ 9.37 $ 9.59 $ 12.21 $ 11.65 $ 11.63
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
TOTAL RETURN....................... (6.30)% 2.35% 30.72% (0.52)% 10.57%
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands)....................... $ 47,534 $ 50,234 $ 150,854 $ 182,977 $ 170,663
Ratio of Expenses to Average Net
Assets (1)(2)..................... 0.88%** 0.80%** 0.80% 0.80% 0.80%
Ratio of Net Investment Income to
Average Net Assets (1)(2)......... 2.32%** 1.22%** 1.29% 1.43% 1.26%
Portfolio Turnover Rate............ 62% 2% % 53 % 51 % 72
- ------------------------------
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income............ $ 0.03 $ 0.01 $ 0.05 $ 0.03 $ 0.05
Ratios before expense
limitation:
Expenses to Average Net
Assets....................... 1.58%** 1.70%** 1.33% 1.00% 1.18%
Net Investment Income to
Average Net Assets........... 1.62%** 0.32%** 0.76% 1.23% 0.88%
</TABLE>
(2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled
to receive a management fee calculated at an annual rate of 0.65% of the
average daily net assets of the Portfolio. The Adviser has agreed to waive a
portion of this fee and/or reimburse expenses of the Portfolio to the extent
that the total operating expenses of the Portfolio exceed 0.80% of the
average daily net assets of the Class A shares and 1.05% of the average
daily net assets of the Class B shares. In the period ended October 31,
1992, the two months ended December 31, 1992, and the years ended December
31, 1993, 1994 and 1995, the Adviser waived management fees and/or
reimbursed expenses totalling $164,000, $72,000, $552,000, $367,000 and
$618,000, respectively, for the Portfolio.
* Commencement of Operations.
** Annualized.
5
<PAGE>
PROSPECTUS SUMMARY
THE FUND
The Fund consists of twenty-eight portfolios, offering institutional
investors and high net worth individual investors a broad range of investment
choices coupled with the advantages of a no-load mutual fund with Morgan Stanley
and its affiliates providing customized services as Adviser, Administrator and
Distributor. Each portfolio offers Class A shares and, except the International
Small Cap, Money Market and Municipal Money Market Portfolios, also offers Class
B shares. Each portfolio has its own investment objective and policies designed
to meet its specific goals. This Prospectus pertains to the Class A and Class B
shares of the Active Country Allocation Portfolio.
-The ACTIVE COUNTRY ALLOCATION PORTFOLIO seeks long-term capital
appreciation by investing in accordance with country weightings determined
by the Adviser in equity securities of non-U.S. issuers which, in the
aggregate, replicate broad country indices.
The other portfolios of the Fund are described in other prospectuses which
may be obtained from the Fund at the address and phone number noted on the cover
page of this Prospectus. The objectives of these other portfolios are listed
below:
GLOBAL AND INTERNATIONAL EQUITY:
-The ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in the equity securities of Asian issuers.
-The CHINA GROWTH PORTFOLIO seeks to provide long-term capital appreciation
by investing primarily in the equity securities of issuers in The People's
Republic of China, Hong Kong and Taiwan.
-The EMERGING MARKETS PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of emerging country issuers.
-The EUROPEAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in the equity securities of European issuers.
-The GLOBAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in the equity securities of issuers throughout the
world, including United States issuers.
-The GOLD PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of foreign and domestic issuers engaged in
gold-related activities.
-The INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in the equity securities of non-United States issuers.
-The INTERNATIONAL MAGNUM PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers in accordance
with EAFE country (as defined in "Investment Objectives and Policies"
below) weightings determined by the Adviser.
-The INTERNATIONAL SMALL CAP PORTFOLIO seeks long-term capital appreciation
by investing primarily in the equity securities of non-United States
issuers with equity market capitalizations of less than $1 billion.
-The JAPANESE EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Japanese issuers.
-The LATIN AMERICAN PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Latin American issuers and debt
securities issued or guaranteed by Latin American governments or
governmental entities.
6
<PAGE>
US EQUITY:
-The AGGRESSIVE EQUITY PORTFOLIO seeks capital appreciation by investing
primarily in corporate equity and equity-linked securities.
-The EMERGING GROWTH PORTFOLIO seeks long-term capital appreciation by
investing primarily in growth-oriented equity securities of small- to
medium-sized corporations.
-The EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation by
investing in growth-oriented equity securities of medium and large
capitalization companies.
-The MICROCAP PORTFOLIO seeks long-term capital appreciation by investing
primarily in growth-oriented equity securities of small corporations.
-The SMALL CAP VALUE EQUITY PORTFOLIO seeks high long-term total return by
investing in undervalued equity securities of small- to medium-sized
companies.
-The U.S. REAL ESTATE PORTFOLIO seeks to provide above average current
income and long-term capital appreciation by investing primarily in equity
securities of companies in the U.S. real estate industry, including real
estate investment trusts.
-The VALUE EQUITY PORTFOLIO seeks high total return by investing in equity
securities which the Adviser believes to be undervalued relative to the
stock market in general at the time of purchase.
EQUITY AND FIXED INCOME:
-The BALANCED PORTFOLIO seeks high total return while preserving capital by
investing in a combination of undervalued equity securities and fixed
income securities.
FIXED INCOME:
-The EMERGING MARKETS DEBT PORTFOLIO seeks high total return by investing
primarily in debt securities of government, government-related and
corporate issuers located in emerging countries.
-The FIXED INCOME PORTFOLIO seeks to produce a high total return consistent
with the preservation of capital by investing in a diversified portfolio of
fixed income securities.
-The GLOBAL FIXED INCOME PORTFOLIO seeks to produce an attractive real rate
of return while preserving capital by investing in fixed income securities
of issuers throughout the world, including United States issuers.
-The HIGH YIELD PORTFOLIO seeks to maximize total return by investing in a
diversified portfolio of high yield fixed income securities that offer a
yield above that generally available on debt securities in the three
highest rating categories of the recognized rating services.
-The MORTGAGE-BACKED SECURITIES PORTFOLIO seeks to produce as high a level
of current income as is consistent with the preservation of capital by
investing primarily in a variety of investment-grade mortgage-backed
securities.
-The MUNICIPAL BOND PORTFOLIO seeks to produce a high level of current
income consistent with the preservation of principal through investment
primarily in municipal obligations, the interest on which is exempt from
federal income tax.
MONEY MARKET:
-The MONEY MARKET PORTFOLIO seeks to maximize current income and preserve
capital while maintaining high levels of liquidity through investing in
high quality money market instruments with remaining maturities of one year
or less.
7
<PAGE>
-The MUNICIPAL MONEY MARKET PORTFOLIO seeks to maximize current tax-exempt
income and preserve capital while maintaining high levels of liquidity
through investing in high-quality money market instruments with remaining
maturities of one year or less which are exempt from federal income tax.
INVESTMENT MANAGEMENT
Morgan Stanley Asset Management Inc., a wholly owned subsidiary of Morgan
Stanley Group Inc., which, together with its affiliated asset management
companies, at December 31, 1995 had approximately $57.4 billion in assets under
management as an investment manager or as a fiduciary adviser, acts as
investment adviser to the Fund and each of its portfolios. See "Management of
the Fund -- Investment Adviser" and "Management of the Fund -- Administrator."
HOW TO INVEST
Class A shares of the Portfolio are offered directly to investors at net
asset value with no sales commission or 12b-1 charges. Class B shares of the
Portfolio are offered at net asset value with no sales commission, but with a
12b-1 fee, which is accrued daily and paid quarterly, equal to 0.25% of the
Class B shares' average daily net assets on an annualized basis. Share purchases
may be made by sending investments directly to the Fund or through the
Distributor. Shares in a Portfolio account opened prior to January 2, 1996
(each, a "Pre-1996 Account") were designated Class A shares on January 2, 1996.
For a Portfolio account opened on or after January 2, 1996 (a "New Account"),
the minimum initial investment is $500,000 for Class A shares and $100,000 for
Class B shares. Certain exceptions to the foregoing minimums apply to (1) shares
in a Pre-1996 Account with a value of $100,000 or more on March 1, 1996 (a
"Grandfathered Class A Account"); (2) Portfolio accounts held by officers of the
Adviser and its affiliates; and (3) certain advisory or asset allocation
accounts, such as Total Funds Management accounts, managed by Morgan Stanley or
its affiliates, including the Adviser ("Managed Accounts"). The Adviser reserves
the right in its sole discretion to determine which of such advisory or asset
allocation accounts shall be Managed Accounts. For information regarding Managed
Accounts, please contact your Morgan Stanley account representative or the Fund
at the telephone number provided on the cover of this Prospectus. Shares in a
Pre-1996 Account with a value of less than $100,000 on March 1, 1996 (a
"Grandfathered Class B Account") converted to Class B shares on March 1, 1996.
The minimum investment levels may be waived at the discretion of the Adviser for
(i) certain employees and customers of Morgan Stanley or its affiliates and
certain trust departments, brokers, dealers, agents, financial planners,
financial services firms, or investment advisers that have entered into an
agreement with Morgan Stanley or its affiliates; and (ii) retirement and
deferred compensation plans and trusts used to fund such plans, including, but
not limited to, those defined in Section 401(a), 403(b) or 457 of the Internal
Revenue Code of 1986, as amended, and "rabbi trusts." See "Purchase of Shares --
Minimum Investment and Account Sizes; Conversion from Class A to Class B
Shares."
The minimum subsequent investment for a Portfolio account is $1,000 (except
for automatic reinvestment of dividends and capital gains distributions for
which there is no minimum). Such subsequent investments will be applied to
purchase additional shares in the same class held by a shareholder in a
Portfolio account. See "Purchase of Shares -- Additional Investments."
8
<PAGE>
HOW TO REDEEM
Class A shares or Class B shares of the Portfolio may be redeemed at any
time, without cost, at the net asset value per share of shares of the applicable
class next determined after receipt of the redemption request. The redemption
price may be more or less than the purchase price. Certain redemptions may cause
involuntary redemption or automatic conversion. Class A or Class B shares held
in New Accounts are subject to involuntary redemption if shareholder
redemption(s) of such shares reduces the value of such account to less than
$100,000 for a continuous 60-day period. Involuntary redemption does not apply
to Managed Accounts, Grandfathered Class A Accounts and Grandfathered Class B
Accounts, regardless of the value of such accounts. Class A shares in a New
Account will convert to Class B shares if shareholder redemption(s) of such
shares reduces the value of such account to less than $500,000 for a continuous
60-day period. Class B shares in a New Account will automatically convert to
Class A shares if shareholder purchases of additional Class B shares or market
activity cause the value of the Class B shares in the New Account to increase to
$500,000 or more. See "Purchase of Shares -- Minimum Account Sizes and
Involuntary Redemption of Shares" and "Redemption of Shares."
RISK FACTORS
The investment policies of the Portfolio entail certain risks and
considerations of which an investor should be aware. The Portfolio will invest
in securities of foreign issuers, including issuers in emerging countries, which
are subject to certain risks not typically associated with domestic securities,
including (1) restrictions on foreign investment and on repatriation of capital
invested in foreign countries, (2) currency fluctuations, (3) the cost of
converting foreign currency into U.S. dollars, (4) potential price volatility
and lesser liquidity of shares traded on foreign country securities markets or
lack of a secondary trading market for such securities and (5) political and
economic risks, including the risk of nationalization or expropriation of assets
and the risk of war. In addition, accounting, auditing, financial and other
reporting standards in foreign countries are not equivalent to U.S. standards
and therefore, disclosure of certain material information may not be made and
less information may be available to investors investing in foreign countries
than in the United States. There is also generally less governmental regulation
of the securities industry in foreign countries than the United States.
Moreover, it may be more difficult to obtain a judgment in a court outside the
United States. See "Investment Objective and Policies" and "Additional
Investment Information." In addition, the Portfolio may invest in repurchase
agreements, lend its portfolio securities, purchase securities on a when-issued
basis and invest in forward foreign currency exchange contracts to hedge
currency risk associated with investment in non-U.S. dollar denominated
securities. Each of these investment strategies involves specific risks which
are described under "Investment Objective and Policies" and "Additional
Investment Information" herein and under "Investment Objectives and Policies" in
the Statement of Additional Information.
9
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Active Country Allocation Portfolio is
described below, together with the policies the Fund employs in its efforts to
achieve this objective. The Active Country Allocation Portfolio's investment
objective is a fundamental policy which may not be changed without the approval
of a majority of the Portfolio's outstanding voting securities. There is no
assurance that the Fund will attain its objective. The investment policies
described below are not fundamental policies and may be changed without
shareholder approval.
The investment objective of the Active Country Allocation Portfolio is to
provide long-term capital appreciation by investing in accordance with country
weightings determined by the Adviser in equity securities of non-U.S. issuers
which, in the aggregate, replicate broad country indices. The Adviser utilizes a
top-down approach in selecting investments for the Portfolio that emphasizes
country selection and weighting rather than individual stock selection. This
approach reflects the Adviser's philosophy that a diversified selection of
securities representing exposure to world markets, based upon the economic
outlook and current valuation levels for each country, is an effective way to
maximize the return and minimize the risk associated with international
investment.
The Adviser determines country allocations for the Portfolio on an ongoing
basis within policy ranges dictated by each country's market capitalization and
liquidity. The Portfolio will invest in the industrialized countries throughout
the world that comprise the Morgan Stanley Capital International EAFE (Europe,
Australia and the Far East) Index. The Portfolio will also invest in emerging
country equity securities. With respect to the Portfolio, the term "emerging
country" applies to any country which, in the opinion of the Adviser, is
generally considered to be an emerging or developing country by the
international financial community, including the International Bank for
Reconstruction and Development (more commonly known as the World Bank) and the
International Finance Corporation. There are currently over 130 countries which,
in the opinion of the Adviser, are generally considered to be emerging or
developing countries by the international financial community, approximately 40
of which currently have stock markets. These countries generally include every
nation in the world except the United States, Canada, Japan, Australia, New
Zealand and most nations located in Western Europe. Currently, investing in many
emerging countries is not feasible or may involve unacceptable political risks.
The Portfolio will focus its investments on those emerging market countries in
which it believes the economies are developing strongly and in which the markets
are becoming more sophisticated. With respect to the portion of the Portfolio
that is invested in emerging country equity securities, the Portfolio initially
intends to invest primarily in some or all of the following countries:
<TABLE>
<S> <C>
Argentina Portugal
Brazil Philippines
India South Africa
Indonesia South Korea
Malaysia Thailand
Mexico Turkey
</TABLE>
As markets in other countries develop, the Portfolio expects to expand and
further diversify the emerging countries in which it invests. The Portfolio does
not intend to invest in any security in a country where the currency is not
freely convertible to U.S. dollars, unless the Portfolio has obtained the
necessary governmental
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licensing to convert such currency or other appropriately licensed or sanctioned
contractual guarantee to protect such investment against loss of that currency's
external value, or the Portfolio has a reasonable expectation at the time the
investment is made that such governmental licensing or other appropriately
licensed or sanctioned guarantee would be obtained or that the currency in which
the security is quoted would be freely convertible at the time of any proposed
sale of the security by the Portfolio.
An emerging country security is one issued by a company that, in the opinion
of the Adviser, has one or more of the following characteristics: (i) its
principal securities trading market is in an emerging country, (ii) alone or on
a consolidated basis it derives 50% or more of its annual revenue from either
goods produced, sales made or services performed in emerging countries; or (iii)
it is organized under the laws of, and has a principal office in, an emerging
country. The Adviser will base determinations as to eligibility on publicly
available information and inquiries made to the companies. (See "Foreign
Investment Risk Factors and Special Considerations" for a discussion of the
nature of information publicly available for non-U.S. companies.)
By analyzing a variety of macroeconomic and political factors, the Adviser
develops fundamental projections on interest rates, currencies, corporate
profits and economic growth for each country. These country projections are used
then to determine what the Adviser believes to be a fair value for the stock
market of each country. Discrepancies between actual value and fair value as
determined by the Adviser provide an expected return for each stock market. The
expected return is adjusted by currency return expectations derived from the
Adviser's purchasing-power parity exchange rate model to arrive at an expected
total return in U.S. dollars. The final country allocation decision is then
arrived at by considering the expected total return in light of various country
specific considerations such as market size, volatility, liquidity and country
risk.
Within a particular country, investments are made through the purchase of
equity securities which, in aggregate, replicate a broad market index, which in
most cases will be the Morgan Stanley Capital International index for the given
country. The Adviser may overweight or underweight an industry segment of a
particular index if it concludes this would be advantageous to the Portfolio.
With respect to the Portfolio, equity securities include common and preferred
stock, convertible securities, and rights and warrants to purchase common
stocks. Indexation of the Portfolio's stock selection reduces stock-specific
risk through diversification and minimizes transaction costs, which can be
substantial in foreign markets.
Common stocks purchased for the Portfolio normally will be listed on a major
stock exchange in the subject country. The Portfolio will not invest in the
stocks of U.S. issuers. For a description of special considerations and certain
risks associated with investments in foreign issuers, see "Additional Investment
Information." The Portfolio may temporarily reduce its equity holdings in
response to adverse market conditions and invest in domestic, Eurodollar and
foreign short-term money market instruments for defensive purposes. See
"Investment Objective and Policies" in the Statement of Additional Information.
Any remaining assets of the Portfolio not invested as described above may be
invested in certain securities or obligations as set forth in "Additional
Investment Information" below.
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<PAGE>
ADDITIONAL INVESTMENT INFORMATION
FOREIGN INVESTMENT. Investment in obligations of foreign issuers and in
foreign branches of domestic banks involves somewhat different investment risks
than those affecting obligations of U.S. issuers. There may be limited publicly
available information with respect to foreign issuers, and foreign issuers are
not generally subject to uniform accounting, auditing and financial standards
and requirements comparable to those applicable to domestic companies. There may
also be less government supervision and regulation of foreign securities
exchanges, brokers and listed companies than in the U.S. Many foreign securities
markets have substantially less volume than U.S. national securities exchanges,
and securities of some foreign issuers are less liquid and more volatile than
securities of comparable U.S. issuers. Brokerage commissions and other
transaction costs on foreign securities exchanges are generally higher than in
the U.S. Dividends and interest paid by foreign issuers may be subject to
withholding and other foreign taxes, which may decrease the net return on
foreign investments as compared to dividends and interest paid to the Portfolios
by domestic companies. See "Taxes". Additional risks include future political
and economic developments, the possibility that a foreign jurisdiction might
impose or change withholding taxes on income payable with respect to foreign
securities, possible seizure, nationalization or expropriation of the foreign
issuer or foreign deposits, and the possible adoption of foreign governmental
restrictions such as exchange controls.
Such investments in securities of foreign issuers are frequently denominated
in foreign currencies, and since the Portfolio may temporarily hold uninvested
reserves in bank deposits in foreign currencies, the value of the Portfolio's
assets as measured in U.S. dollars may be affected favorably or unfavorably by
changes in currency rates and in exchange control regulations, and the Portfolio
may incur costs in connection with conversions between various currencies.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The Portfolio may enter into
forward foreign currency exchange contracts, that provide for the purchase or
sale of an amount of a specified foreign currency at a future date. Purposes for
which such contracts may be used include protecting against a decline in a
foreign currency against the U.S. dollar between the trade date and settlement
date when the Portfolio purchases or sells securities, locking in the U.S.
dollar value of dividends declared on securities held by the Portfolio and
generally protecting the U.S. dollar value of securities held by the Portfolio
against exchange rate fluctuation. Such contracts may also be used as a
protective measure against the effects of fluctuating rates of currency exchange
and exchange control regulations. While such forward contracts may limit losses
to the Portfolio as a result of exchange rate fluctuation, they will also limit
any gains that may otherwise have been realized. See "Investment Objectives and
Policies -- Forward Foreign Currency Contracts" in the Statement of Additional
Information.
LOANS OF PORTFOLIO SECURITIES. The Portfolio may lend its securities to
brokers, dealers, domestic and foreign banks or other financial institutions for
the purpose of increasing its net investment income. These loans must be secured
continuously by cash or equivalent collateral or by a letter of credit at least
equal to the market value of the securities loaned plus accrued interest or
income. There may be risks of delay in recovery of the securities or even loss
of rights in the collateral should the borrower of the securities fail
financially. The Portfolio will not enter into securities loan transactions
exceeding, in the aggregate, 33 1/3% of the market value of the Portfolio's
total assets. For more detailed information about securities lending, see
"Investment Objectives and Policies" in the Statement of Additional Information.
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<PAGE>
MONEY MARKET INSTRUMENTS. The Portfolio is permitted to invest in money
market instruments, although the Portfolio intends to stay invested in
securities satisfying its primary investment objective to the extent practical.
The Portfolio may make money market investments pending other investment or
settlement for liquidity, or in adverse market conditions. The money market
investments permitted for the Portfolio include obligations of the United States
Government and its agencies and instrumentalities; obligations of foreign
sovereignties; other debt securities; commercial paper including bank
obligations; certificates of deposit (including Eurodollar certificates of
deposit); and repurchase agreements. For more detailed information about these
money market investments, see "Description of Securities and Ratings" in the
Statement of Additional Information.
OPTIONS AND FUTURES. The Portfolio may write (i.e., sell) covered call
options and covered put options on portfolio securities. By selling a covered
call option, the Portfolio would become obligated during the term of the option
to deliver the securities underlying the option should the option holder choose
to exercise the option before the option's termination date. In return for the
call it has written, the Portfolio will receive from the purchaser (or option
holder) a premium which is the price of the option, less a commission charged by
a broker. The Portfolio will keep the premium regardless of whether the option
is exercised. By selling a covered put option, the Portfolio incurs an
obligation to buy the security underlying the option from the purchaser of the
put at the option's exercise price at any time during the option period, at the
purchaser's election (certain options written by the Portfolio will be
exercisable by the purchaser only on a specific date). A call option is
"covered" if the Portfolio owns the security underlying the option it has
written or has an absolute or immediate right to acquire the security by holding
a call option on such security, or maintains a sufficient amount of cash, cash
equivalents or liquid securities to purchase the underlying security. Generally,
a put option is "covered" if the Fund maintains cash, U.S. Government securities
or other high grade debt obligations equal to the exercise price of the option,
or if the Fund holds a put option on the same underlying security with a similar
or higher exercise price.
When the Portfolio writes covered call options, it augments its income by
the premiums received and is thereby hedged to the extent of that amount against
a decline in the price of the underlying securities. The premiums received will
offset a portion of the potential loss incurred by the Portfolio if the
securities underlying the options are ultimately sold by the Portfolio at a
loss. However, during the option period, the Portfolio has, in return for the
premium on the option, given up the opportunity for capital appreciation above
the exercise price should the market price of the underlying security increase,
but has retained the risk of loss should the price of the underlying security
decline.
The Portfolio will write covered put options to receive the premiums paid by
purchasers (when the Adviser wishes to purchase the security underlying the
option at a price lower than its current market price, in which case the
Portfolio will write the covered put at an exercise price reflecting the lower
purchase price sought) and to close out a long put option position.
The Portfolio may also purchase put or call options on its portfolio
securities. When the Portfolio purchases a call option it acquires the right to
buy a designated security at a designated price (the "exercise price"), and when
the Portfolio purchases a put option it acquires the right to sell a designated
security at the exercise price, in each case on or before a specified date (the
"termination date"), which is usually not more than nine months from the date
the option is issued. The Portfolio may purchase call options to close out a
covered call position or to protect against an increase in the price of a
security it anticipates purchasing. The Portfolio may purchase put
13
<PAGE>
options on securities which it holds in its portfolio to protect itself against
a decline in the value of the security. If the value of the underlying security
were to fall below the exercise price of the put purchased in an amount greater
than the premium paid for the option, the Portfolio would incur no additional
loss. The Portfolio may also purchase put options to close out written put
positions in a manner similar to call option closing purchase transactions.
There are no other limits on the Portfolio's ability to purchase call and put
options.
The Portfolio may enter into futures contracts and options on futures
contracts as a hedge against fluctuations in the price of a security it holds or
intends to acquire, but not for speculation or for achieving leverage. The
Portfolio may also enter into futures transactions to remain fully invested and
to reduce transaction costs. The Portfolio may enter into futures contracts and
options on futures contracts provided that not more than 5% of the Portfolio's
total assets at the time of entering into the contract or option is required as
deposit to secure obligations under all such contracts and options, and provided
that not more than 20% of the Portfolio's total assets in the aggregate is
invested in options, futures contracts and options on futures contracts.
The Portfolio may purchase and write call and put options on futures
contracts that are traded on any international exchange, traded over the counter
or which are synthetic options or futures or equity swaps, and enter into
closing transactions with respect to such options to terminate an existing
position. An option on a futures contract gives the purchaser the right (in
return for the premium paid) to assume a position in the futures contract (a
long position if the option is a call and a short position if the option is a
put) at a specified exercise price at any time during the term of the option.
The Portfolio will purchase and write options on futures contracts for identical
purposes to those set forth above for the purchase of a futures contract
(purchase of a call option or sale of a put option) and the sale of a futures
contract (purchase of a put option or sale of a call option), or to close out a
long or short position in futures contracts.
The primary risks associated with the use of futures and options are (i)
imperfect correlation between the change in market value of the stocks held by
the Portfolio and the prices of futures and options relating to the stocks
purchased or sold by the Portfolio; and (ii) possible lack of a liquid secondary
market for a futures contract and the resulting inability to close a futures
position which could have an adverse impact on the Portfolio's ability to hedge.
In the opinion of the Board of Directors, the risk that the Portfolio will be
unable to close out a futures position or options contract will be minimized by
only entering into futures contracts or options transactions for which there
appears to be a liquid secondary market.
REPURCHASE AGREEMENTS. The Portfolio may enter into repurchase agreements
with brokers, dealers or banks that meet the credit guidelines adopted by the
Fund's Directors. In a repurchase agreement, the Portfolio buys a security from
a seller that has agreed to repurchase it at a mutually agreed upon date and
price, reflecting the interest rate effective for the term of the agreement. The
term of these agreements is usually from overnight to one week and never exceeds
one year. Repurchase agreements may be viewed as a fully collateralized loan of
money by the Portfolio to the seller. The Portfolio always receives securities
with a market value at least equal to the purchase price (including accrued
interest) as collateral and this value is maintained during the term of the
agreement. If the seller defaults and the collateral value declines, the
Portfolio might incur a loss. If bankruptcy proceedings are commenced with
respect to the seller, the Portfolio's realization upon the collateral may be
delayed or limited. The aggregate of certain repurchase agreements and certain
other investments is limited as set forth under "Investment Limitations."
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<PAGE>
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Portfolio may purchase
securities on a when-issued or delayed delivery basis. In such transactions,
instruments are bought with payment and delivery taking place in the future in
order to secure what is considered to be an advantageous yield or price at the
time of the transaction. Delivery of and payment for these securities may take
as long as a month or more after the date of the purchase commitment but will
take place no more than 120 days after the trade date. The Portfolio will
maintain with the Custodian a separate account with a segregated portfolio of
high-grade debt securities or cash in an amount at least equal to these
commitments. The payment obligation and the interest rates that will be received
are each fixed at the time the Portfolio enters into the commitment and no
interest accrues to the Portfolio until settlement. Thus, it is possible that
the market value at the time of settlement could be higher or lower than the
purchase price if the general level of interest rates has changed. It is a
current policy of the Portfolio not to enter into when-issued commitments
exceeding, in the aggregate, 15% of the market value of the Portfolio's total
assets less liabilities other than the obligations created by these commitments.
INVESTMENT LIMITATIONS
As a diversified investment company, the Portfolio is subject to the
following limitations: (a) as to 75% of its total assets, the Portfolio may not
invest more than 5% of its total assets in the securities of any one issuer,
except obligations of the United States Government and its agencies and
instrumentalities, and (b) the Portfolio may not own more than 10% of the
outstanding voting securities of any one issuer.
The Portfolio also operates under certain investment restrictions that are
deemed fundamental limitations and may be changed only with the approval of the
holders of a majority of the Portfolio's outstanding shares. See "Investment
Limitations" in the Statement of Additional Information. In addition, the
Portfolio operates under certain non-fundamental investment limitations as
described below and in the Statement of Additional Information. The Portfolio
may not (i) enter into repurchase agreements with more than seven days to
maturity if, as a result, more than 10% of the market value of the Portfolio's
net assets would be invested in such repurchase agreements and other investments
for which market quotations are not readily available or which are otherwise
illiquid; (ii) borrow money, except from banks for extraordinary or emergency
purposes, and then only in amounts up to 10% of the value of the Portfolio's
total assets, taken at cost at the time of borrowing; or purchase securities
while borrowings exceed 5% of its total assets; (iii) mortgage, pledge or
hypothecate any assets except in connection with any such borrowing in amounts
up to 10% of the value of the Portfolio's net assets at the time of borrowing;
(iv) invest in fixed time deposits with a duration of over seven calendar days;
or (v) invest in fixed time deposits with a duration of from two business days
to seven calendar days if more than 10% of the Portfolio's total assets would be
invested in these deposits.
MANAGEMENT OF THE FUND
INVESTMENT ADVISER. Morgan Stanley Asset Management Inc. is the Investment
Adviser and Administrator of the Fund and each of its Portfolios. The Adviser
provides investment advice and portfolio management services, pursuant to an
Investment Advisory Agreement and, subject to the supervision of the Fund's
Board of Directors, makes each of the Portfolio's day-to-day investment
decisions, arranges for the execution of portfolio transactions and generally
manages each of the Portfolio's investments. The Adviser is entitled to receive
from the Active Country Allocation Portfolio an annual management fee, payable
quarterly, equal to 0.65% of the average daily net assets of the Portfolio.
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<PAGE>
The fees of the Portfolio, which involves international investments, are
higher than those of most investment companies but comparable to those of
investment companies with similar objectives. The Adviser has agreed to a
reduction in the fees payable to it and to reimburse the Portfolio, if
necessary, if such fees would cause total annual operating expenses of the
Portfolio to exceed 0.80% of the average daily net assets of the Class A shares
of the Portfolio and 1.05% of the average daily net assets of the Class B shares
of the Portfolio.
The Adviser, with principal offices at 1221 Avenue of the Americas, New
York, New York 10020, conducts a worldwide portfolio management business,
providing a broad range of portfolio management services to customers in the
United States and abroad. At December 31, 1995, the Adviser, together with its
affiliated asset management companies, managed investments totaling
approximately $57.4 billion, including approximately $41.9 billion under active
management and $15.5 billion as Named Fiduciary or Fiduciary Adviser. See
"Management of the Fund" in the Statement of Additional Information.
PORTFOLIO MANAGERS. BARTON M. BIGGS, MADHAV DHAR, FRANCINE J. BOVICH AND
ANN D. THIVIERGE. Barton Biggs has been Chairman and a director of the Adviser
since 1980 and a Managing Director of Morgan Stanley since 1975. He is also a
director of Morgan Stanley Group Inc. and a director and officer of several
registered investment companies to which the Adviser and certain of its
affiliates provide investment advisory services. Mr. Biggs holds a B.A. from
Yale University and an M.B.A. from New York University. Madhav Dhar is a
Managing Director of Morgan Stanley. He joined the Adviser in 1984 to focus on
global asset allocation and investment strategy and now heads the Adviser's
emerging markets group and serves as the group's principal portfolio manager.
Mr. Dhar also coordinates the Adviser's developing country funds effort and has
been involved in the launching of the Adviser's country funds. He is the
portfolio manager of the Fund's Emerging Markets Portfolio, the Emerging Markets
and Global Equity Allocation Funds of the Morgan Stanley Fund, Inc., and the
Morgan Stanley Emerging Markets Fund, Inc. (a closed-end investment company
listed on the New York Stock Exchange). Mr. Dhar is also a director of the
Morgan Stanley Emerging Markets Fund, Inc. He holds a B.S. (honors) from St.
Stephens College, Delhi University (India), and an M.B.A. from Carnegie-Mellon
University. Francine Bovich joined the Adviser as a Principal in 1993. She is
responsible for product development, portfolio management and communication of
the Adviser's asset allocation strategy to institutional investor clients.
Previously, Ms. Bovich was a Principal and Executive Vice President of Westwood
Management Corp. ("Westwood"), a registered investment adviser. Before joining
Westwood, she was a Managing Director of Citicorp Investment Management, Inc.
(now Chancellor Capital Management), where she was responsible for the
Institutional Investment Management group. Ms. Bovich began her investment
career with Banker's Trust Company. She holds a B.A. in Economics from
Connecticut College and an M.B.A. in Finance from New York University. Ann
Thivierge is a Principal of the Adviser. She is a member of the Adviser's asset
allocation committee, primarily representing the Total Fund Management team
since its inception in 1991. Prior to joining the Adviser in 1986, she spent two
years at Edgewood Management Company, a privately held investment management
firm. Ms. Thivierge holds a B.A. in International Relations from James Madison
College, Michigan State University, and an M.B.A. in Finance from New York
University.
ADMINISTRATOR. The Adviser also provides the Fund with administrative
services pursuant to an Administration Agreement. The services provided under
the Administration Agreement are subject to the supervision of the Officers and
the Board of Directors of the Fund and include day-to-day administration of
matters related to the corporate existence of the Fund, maintenance of its
records, preparation of reports, supervision of the Fund's arrangements with its
custodian and assistance in the preparation of the Fund's registration
statements under
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<PAGE>
Federal and State laws. The Administration Agreement also provides that the
Administrator, through its agents, will provide the Fund dividend disbursing and
transfer agent services. For its services under the Administration Agreement,
the Fund pays the Adviser a monthly fee which on an annual basis equals 0.15% of
the average daily net assets of the Portfolio.
Under an agreement between the Adviser and The Chase Manhattan Bank, N.A.
("Chase"), Chase provides certain administrative services to the Fund. In a
merger completed on September 1, 1995, Chase succeeded to all of the rights and
obligations under the U.S. Trust Administration Agreement between the Adviser
and the United States Trust Company of New York ("U.S. Trust"), pursuant to
which U.S. Trust had agreed to provide certain administrative services to the
Fund. Pursuant to a delegation clause in the U.S. Trust Administration
Agreement, U.S. Trust delegated its administration responsibilities to Chase
Global Funds Services Company ("CGFSC"), formerly known as Mutual Funds Service
Company, which after the merger with Chase is a subsidiary of Chase and will
continue to provide certain administrative services to the Fund. The Adviser
supervises and monitors such administrative services provided by CGFSC. The
services provided under the Administration Agreement and the U.S. Trust
Administration Agreement are also subject to the supervision of the Board of
Directors of the Fund. The Board of Directors of the Fund has approved the
provision of services described above pursuant to the Administration Agreement
and the U.S. Trust Administration Agreement as being in the best interests of
the Fund. CGFSC's business address is 73 Tremont Street, Boston, Massachusetts
02108-3913. For additional information regarding the Administration Agreement or
the U.S. Trust Administration Agreement, see "Management of the Fund" in the
Statement of Additional Information.
LOCAL ADMINISTRATOR FOR THE PORTFOLIO. The Portfolio is required under
Brazilian law to have a local administrator in Brazil. Unibanco-Uniao (the
"Brazilian Administrator"), a Brazilian corporation, acts as the Portfolio's
Brazilian administrator pursuant to an agreement with the Portfolio (the
"Brazilian Administration Agreement"). Under the Brazilian Administration
Agreement, the Brazilian Administrator performs various services for the
Portfolio, including effecting the registration of the Portfolio's foreign
capital with the Central Bank of Brazil, effecting all foreign exchange
transactions related to the Portfolio's investments in Brazil and obtaining all
approvals required for the Portfolio to make remittances of income and capital
gains and for the repatriation of the Portfolio's investments pursuant to
Brazilian law. For its services, the Brazilian Administrator is paid an annual
fee equal to 0.125% of the Portfolio's average weekly net assets invested in
Brazil, paid monthly. The principal office of the Brazilian Administrator is
located at Avenida Eusebio Matoso, 891, Sao Paulo, S.P., Brazil. The Brazilian
Administration Agreement is terminable upon six months' notice by either party.
The Brazilian Administrator may be replaced only by an entity authorized to act
as a joint manager of a managed portfolio of bonds and securities under
Brazilian law.
DIRECTORS AND OFFICERS. Pursuant to the Fund's Articles of Incorporation,
the Board of Directors decides upon matters of general policy and review the
actions of the Fund's Adviser, Administrator and Distributor. The Officers of
the Fund conduct and supervise its daily business operations.
DISTRIBUTOR. Morgan Stanley serves as the exclusive Distributor of the
shares of the Fund. Under its Distribution Agreement with the Fund, Morgan
Stanley sells shares of the Fund upon the terms and at the current offering
price described in this Prospectus. Morgan Stanley is not obligated to sell any
certain number of shares of the Fund.
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The Portfolio currently offers only the classes of shares offered by this
Prospectus. The Portfolio may in the future offer one or more classes of shares
with features, distribution expenses or other expenses that are different from
those of the classes currently offered.
The Fund has adopted a Plan of Distribution with respect to the Class B
shares pursuant to Rule 12b-1 under the 1940 Act (the "Plan"). Under the Plan,
the Distributor is entitled to receive from the Portfolio a distribution fee,
which is accrued daily and paid quarterly, of 0.25% of the Class B shares'
average daily net assets on an annualized basis. The Distributor expects to
reallocate most of its fee to its investment representatives. The Distributor
may, in its discretion, voluntarily waive from time to time all or any portion
of its distribution fee and each of the Distributor and the Adviser is free to
make additional payments out of its own assets to promote the sale of Fund
shares, including payments that compensate financial institutions for
distribution services or shareholder services.
The Plan is designed to compensate the Distributor for its services, not to
reimburse the Distributor for its expenses, and the Distributor may retain any
portion of the fee that it does not expend in fulfillment of its obligations to
the Fund.
EXPENSES. The Portfolio is responsible for payment of certain other fees
and expenses (including legal fees, accountants' fees, custodial fees and
printing and mailing costs) specified in the Administration and Distribution
Agreements.
PURCHASE OF SHARES
Class A and Class B shares of the Portfolio may be purchased, without sales
commission, at the net asset value per share next determined after receipt of
the purchase order by the Portfolio. See "Valuation of Shares."
MINIMUM INVESTMENT AND ACCOUNT SIZES; CONVERSION FROM CLASS A TO CLASS B SHARES
For an account for the Portfolio opened on or after January 2, 1996 (a "New
Account"), the minimum initial investment and minimum account size are $500,000
for Class A shares and $100,000 for Class B shares. Managed Accounts may
purchase Class A shares without being subject to such minimum initial investment
or minimum account size requirements for a Portfolio account. Officers of the
Adviser and its affiliates are subject to the minimums for a Portfolio account,
except they may purchase Class B shares subject to a minimum initial investment
and minimum account size of $5,000 for a Portfolio account.
If the value of a New Account containing Class A shares falls below $500,000
(but remains at or above $100,000) because of shareholder redemption(s), the
Fund will notify the shareholder, and if the account value remains below
$500,000 (but remains at or above $100,000) for a continuous 60-day period, the
Class A shares in such account will convert to Class B shares and will be
subject to the distribution fee and other features applicable to the Class B
shares. The Fund, however, will not convert Class A shares to Class B shares
based solely upon changes in the market that reduce the net asset value of
shares. Under current tax law, conversions between share classes are not a
taxable event to the shareholder.
Shares in a Portfolio account opened prior to January 2, 1996 (a "Pre-1996
Account") were designated Class A shares on January 2, 1996. Shares in a
Pre-1996 Account with a value of $100,000 or more on March 1, 1996 (a
"Grandfathered Class A Account") remained Class A shares regardless of account
size thereafter. Except
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for shares in a Managed Account, shares in a Pre-1996 Account with a value of
less than $100,000 on March 1, 1996 (a "Grandfathered Class B Account")
converted to Class B shares on March 1, 1996. Grandfathered Class A Accounts and
Managed Accounts are not subject to conversion from Class A shares to Class B
shares.
Investors may also invest in the Fund by purchasing shares through a trust
department, broker, dealer, agent, financial planner, financial services firm or
investment adviser. An investor may be charged an additional service or
transaction fee by that institution. The minimum investment levels may be waived
at the discretion of the Adviser for (i) certain employees and customers of
Morgan Stanley or its affiliates and certain trust departments, brokers,
dealers, agents, financial planners, financial services firms, or investment
advisers that have entered into an agreement with Morgan Stanley or its
affiliates; and (ii) retirement and deferred compensation plans and trusts used
to fund such plans, including, but not limited to, those defined in Section
401(a), 403(b) or 457 of the Internal Revenue Code of 1986, as amended, and
"rabbi trusts." Broker-dealers who make purchases for their customers may charge
a fee for such services.
The Fund reserves the right to modify or terminate the conversion features
of the shares as stated above at any time upon 60-days' notice to shareholders.
MINIMUM ACCOUNT SIZES AND INVOLUNTARY REDEMPTION OF SHARES
If the value of a New Account falls below $100,000 because of shareholder
redemption(s), the Fund will notify the shareholder, and if the account value
remains below $100,000 for a continuous 60-day period, the shares in such
account are subject to redemption by the Fund and, if redeemed, the net asset
value of such shares will be promptly paid to the shareholder. The Fund,
however, will not redeem shares based solely upon changes in the market that
reduce the net asset value of shares.
For purposes of redemptions by the Fund, the foregoing minimum account size
requirements do not apply to New Accounts containing Class B shares held by
officers of the Adviser or its affiliates. However, if the value of such account
held by an officer of the Adviser or its affiliates falls below $5,000 because
of shareholder redemption(s), the Fund will notify the shareholder, and if the
account value remains $5,000 for a continuous 60-day period, the shares in such
account are subject to redemption by the Fund and, if redeemed, the net asset
value of such shares will be promptly paid to the shareholder.
Grandfathered Class A Accounts, Grandfathered Class B Accounts and Managed
Accounts are not subject to involuntary redemption.
The Fund reserves the right to modify or terminate the involuntary
redemption features of the shares as stated above at any time upon 60-days'
notice to shareholders.
CONVERSION FROM CLASS B TO CLASS A SHARES
If the value of Class B shares in a Portfolio account increases, whether due
to shareholder share purchases or market activity, to $500,000 or more, the
Class B shares will convert to Class A Shares. Under current tax law, such
conversion is not a taxable event to the shareholder. Class A shares converted
from Class B shares are subject to the same minimum account size requirements
that are applicable to New Accounts containing Class A shares, as stated above.
The Fund reserves the right to modify or terminate this conversion feature at
any time upon 60-days' notice to shareholders.
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INITIAL PURCHASES DIRECTLY FROM THE FUND
The Fund's determination of an investor's eligibility to purchase shares of
a given class will take precedence over the investor's selection of a class.
Assuming the investor is eligible for the class, the Fund will select the most
favorable class for the investor, if the investor has not done so.
INITIAL INVESTMENTS
1) BY CHECK. An account may be opened by completing and signing an Account
Registration Form and mailing it, together with a check ($500,000 minimum for
Class A shares of the Portfolio and $100,000 for Class B shares of the
Portfolio, with certain exceptions for Morgan Stanley employees and select
customers) payable to "Morgan Stanley Institutional Fund, Inc. -- Active
Country Allocation Portfolio", to:
Morgan Stanley Institutional Fund, Inc.
P.O. Box 2798
Boston, Massachusetts 02208-2798
Payment will be accepted only in U.S. dollars, unless prior approval for
payment by other currencies is given by the Fund. The Class(es) of shares of
the Portfolio to be purchased should be designated on the Account Registration
Form. For purchases by check, the Fund is ordinarily credited with Federal
Funds within one business day. Thus your purchase of shares by check is
ordinarily credited to your account at the net asset value per share of the
Portfolio determined on the next business day after receipt.
2) BY FEDERAL FUNDS WIRE. Purchases may be made by having your bank wire
Federal Funds to the Fund's bank account. In order to ensure prompt receipt
of your Federal Funds Wire, it is important that you follow these steps:
A. Telephone the Fund (toll free: 1-800-548-7786) and provide us with your
name, address, telephone number, Social Security or Tax Identification
Number, the portfolio(s) selected, the class selected, the amount being
wired, and by which bank. We will then provide you with a Fund account
number. (Investors with existing accounts should also notify the Fund prior
to wiring funds.)
B. Instruct your bank to wire the specified amount to the Fund's Wire
Concentration Bank Account (be sure to have your bank include the name of
the portfolio(s) selected, the class selected and the account number
assigned to you) as follows:
Chase Manhattan Bank, N.A.
One Manhattan Plaza
New York, NY 10081-1000
ABA #021000021
DDA #910-2-733293
Attn: Morgan Stanley Institutional Fund, Inc.
Ref: (Portfolio name, your account number, your account name)
Please call the Fund at 1-800-548-7786 prior to wiring funds.
C. Complete and sign the Account Registration Form and mail it to the address
shown thereon.
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Purchase orders for shares of the Portfolio which are received prior to the
regular close of the NYSE (currently 4:00 p.m. Eastern Time) will be executed
at the price computed on the date of receipt as long as the Transfer Agent
receives payment by check or in Federal Funds prior to the regular close of
the NYSE on such day.
Federal Funds purchase orders will be accepted only on a day on which the Fund
and Chase (the "Custodian Bank") are open for business. Your bank may charge a
service fee for wiring Federal Funds.
3) BY BANK WIRE. The same procedure outlined under "By Federal Funds Wire"
above must be followed in purchasing shares by bank wire. However, money
transferred by bank wire may or may not be converted into Federal Funds the
same day, depending on the time the money is received and the bank handling
the wire. Prior to such conversion, an investor's money will not be invested
and, therefore, will not be earning dividends. Your bank may charge a service
fee for wiring funds.
ADDITIONAL INVESTMENTS
You may add to your account at any time (minimum additional investment
$1,000, except for automatic reinvestment of dividends and capital gains
distributions for which there are no minimums) by purchasing shares at net asset
value by mailing a check to the Fund (payable to "Morgan Stanley Institutional
Fund, Inc. -- Active Country Allocation Portfolio") at the above address or by
wiring monies to the Custodian Bank as outlined above. It is very important that
your account name, the portfolio name and the class selected be specified in the
letter or wire to assure proper crediting to your account. In order to ensure
that your wire orders are invested promptly, you are requested to notify one of
the Fund's representatives (toll-free 1-800-548-7786) prior to the wire date.
Additional investments will be applied to purchase additional shares in the same
class held by a shareholder in a Portfolio account.
OTHER PURCHASE INFORMATION
The purchase price of the Class A and Class B shares of the Portfolio is the
net asset value next determined after the order is received. See "Valuation of
Shares." An order received prior to the close of the New York Stock Exchange
("NYSE"), which is currently 4:00 p.m. Eastern Time, will be executed at the
price computed on the date of receipt; an order received after the close of the
NYSE will be executed at the price computed on the next day the NYSE is open as
long as the Transfer Agent receives payment by check or in Federal Funds prior
to the regular close of the NYSE on such day.
Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends. The net asset value of Class B shares will generally be
lower than the net asset value of Class A shares as a result of the distribution
expense charged to Class B shares. It is expected, however, that the net asset
value per share of the two classes will tend to converge immediately after the
recording of dividends which will differ by approximately the amount of the
distribution expense accrual differential between the classes.
In the interest of economy and convenience, and because of the operating
procedures of the Fund, certificates representing shares of the Portfolio will
not be issued. All shares purchased are confirmed to you and credited to your
account on the Fund's books maintained by the Adviser or its agents. You will
have the same rights and ownership with respect to such shares as if
certificates had been issued.
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To ensure that checks are collected by the Fund, withdrawals of investments
made by check are not presently permitted until payment for the purchase has
been received, which may take up to eight business days after the date of
purchase. As a condition of this offering, if a purchase is cancelled due to
nonpayment or because your check does not clear, you will be responsible for any
loss the Fund or its agents incur. If you are already a shareholder, the Fund
may redeem shares from your account(s) to reimburse the Fund or its agents for
any loss. In addition, you may be prohibited or restricted from making future
investments in the Fund.
Investors may also invest in the Fund by purchasing shares through the
Distributor.
EXCESSIVE TRADING
Frequent trades involving either substantial portfolio assets or a
substantial portion of your account or accounts controlled by you can disrupt
management of a portfolio and raise its expenses. Consequently, in the interest
of all the stockholders of the Portfolio and the Portfolio's performance, the
Fund may in its discretion bar a stockholder that engages in excessive trading
of shares of any class of a portfolio from further purchases of shares of the
Fund for an indefinite period. The Fund considers excessive trading to be more
than one purchase and sale involving shares of the same class of a portfolio of
the Fund within any 120-day period. As an example,
exchanging shares of portfolios of the Fund as follows amounts to excessive
trading: exchanging Class A shares of Portfolio A for Class A shares of
Portfolio B, then exchanging Class A shares of Portfolio B for Class A shares of
Portfolio C and again exchanging Class A shares of Portfolio C for Class A
shares of Portfolio B within a 120-day period. Two types of transactions are
exempt from these excessive trading restrictions: (1) trades exclusively between
money market portfolios; and (2) trades done in connection with an asset
allocation service, such as TFM Accounts, managed or advised by MSAM and/or any
of its affiliates.
REDEMPTION OF SHARES
You may withdraw all or any portion of the amount in your account by
redeeming shares at any time. Please note that purchases made by check are not
permitted to be redeemed until payment of the purchase has been collected, which
may take up to eight business days after purchase. The Fund will redeem Class A
shares or Class B shares of the Portfolio at the next determined net asset value
of shares of the applicable class. On days that both the NYSE and the Custodian
Bank are open for business, the net asset value per share of the Portfolio is
determined at the close of trading of the NYSE (currently 4:00 p.m. Eastern
Time). Shares of the Portfolio may be redeemed by mail or telephone. No charge
is made for redemption. Any redemption proceeds may be more or less than the
purchase price of your shares depending on, among other factors, the market
value of the investment securities held by the Portfolio.
BY MAIL
The Portfolio will redeem its Class A shares or Class B shares at the net
asset value determined on the date the request is received, if the request is
received in "good order" before the regular close of the NYSE. Your request
should be addressed to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798,
Boston, Massachusetts 02208-2798, except that deliveries by overnight courier
should be addressed to Morgan Stanley Institutional Fund, Inc., c/o Chase Global
Funds Services Company, 73 Tremont Street, Boston, Massachusetts 02108-3913.
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"Good order" means that the request to redeem shares must include the
following documentation:
(a) A letter of instruction or a stock assignment specifying the class
and number of shares or dollar amount to be redeemed, signed by all
registered owners of the shares in the exact names in which they are
registered;
(b) Any required signature guarantees (see "Further Redemption
Information" below); and
(c) Other supporting legal documents, if required, in the case of
estates, trusts, guardianships, custodianships, corporations, pension and
profit-sharing plans and other organizations.
Shareholders who are uncertain of requirements for redemption should consult
with a Morgan Stanley Institutional Fund representative.
BY TELEPHONE
Provided you have previously elected the Telephone Redemption Option on the
Account Registration Form, you can request a redemption of your shares by
calling the Fund and requesting the redemption proceeds be mailed to you or
wired to your bank. Please contact one of Morgan Stanley Institutional Fund's
representatives for further details. In times of drastic market conditions, the
telephone redemption option may be difficult to implement. If you experience
difficulty in making a telephone redemption, your request may be made by mail or
overnight courier and will be implemented at the net asset value next determined
after it is received. Redemption requests sent to the Fund through express mail
must be mailed to the address of the Dividend Disbursing and Transfer Agent
listed under "General Information." The Fund and the Fund's transfer agent (the
"Transfer Agent") will employ reasonable procedures to confirm that the
instructions communicated by telephone are genuine. These procedures include
requiring the investor to provide certain personal identification information at
the time an account is opened and prior to effecting each transaction requested
by telephone. In addition, all telephone transaction requests will be recorded
and investors may be required to provide additional telecopied written
instructions regarding transaction requests. Neither the Fund nor the Transfer
Agent will be responsible for any loss, liability, cost or expense for following
instructions received by telephone that either of them reasonably believes to be
genuine.
To change the commercial bank or account designated to receive redemption
proceeds, a written request must be sent to the Fund at the address above.
Requests to change the bank or account must be signed by each shareholder and
each signature must be guaranteed.
FURTHER REDEMPTION INFORMATION
Normally the Fund will make payment for all shares redeemed within one
business day of receipt of the request, but in no event will payment be made
more than seven days after receipt of a redemption request in good order.
However, payments to investors redeeming shares which were purchased by check
will not be made until payment for the purchase has been collected, which may
take up to eight days after the date of purchase. The Fund may suspend the right
of redemption or postpone the date upon which redemptions are effected at times
when the NYSE is closed, or under any emergency circumstances as determined by
the Securities and Exchange Commission (the "Commission").
If the Board of Directors determines that it would be detrimental to the
best interests of the remaining shareholders of the Portfolio to make payment
wholly or partly in cash, the Fund may pay the redemption
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<PAGE>
proceeds in whole or in part by a distribution in-kind of securities held by the
Portfolio in lieu of cash in conformity with applicable rules of the Commission.
Distributions-in-Kind will be made in readily marketable securities. Investors
may incur brokerage charges on the sale of portfolio securities so received in
payment of redemptions.
To protect your account, the Fund and its agents from fraud, signature
guarantees are required for certain redemptions to verify the identity of the
person who has authorized a redemption from your account. Please contact the
Fund for further information. See "Redemption of Shares" in the Statement of
Additional Information.
SHAREHOLDER SERVICES
EXCHANGE FEATURES
You may exchange shares that you own in the Portfolio for shares of any
other available portfolio of the Fund (other than the International Equity
Portfolio, which is closed to new investors). In exchanging for shares of a
portfolio with more than one class, the class of shares you receive in the
exchange will be determined in the same manner as any other purchase of shares
and will not be based on the class of shares surrendered for the exchange.
Consequently, the same minimum initial investment and minimum account size for
determining the class of shares received in the exchange will apply. See
"Purchase of Shares." Shares of the portfolios may be exchanged by mail or
telephone. The privilege to exchange shares by telephone is automatic and made
available without shareholder election. Before you make an exchange, you should
read the prospectus of the portfolio(s) in which you seek to invest. Because an
exchange transaction is treated as a redemption followed by a purchase, an
exchange would be considered a taxable event for shareholders subject to tax.
The exchange privilege is only available with respect to portfolios that are
registered for sale in a shareholder's state of residence. The exchange
privilege may be modified or terminated by the Fund at any time upon 60-days'
notice to shareholders.
BY MAIL
In order to exchange shares by mail, you should include in the exchange
request the name and account number of the Portfolio, the name(s) of the
portfolio(s) and class(es) of shares into which you intend to exchange shares,
and the signatures of all registered account holders. Send the exchange request
to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798, Boston, MA
02208-2798.
BY TELEPHONE
When exchanging shares by telephone, have ready the name, class of shares
and account number of the current portfolio, the names of the portfolio(s) and
class(es) of shares into which you intend to exchange shares, your Social
Security number or Tax I.D. number, and your account address. Requests for
telephone exchanges received prior to 4:00 p.m. (Eastern Time) are processed at
the close of business that same day based on the net asset value of the class of
the portfolios involved in the exchange of shares at the close of business.
Requests received after 4:00 p.m. are processed the next business day based on
the net asset value determined at the close of business on such day. For
additional information regarding responsibility for the authenticity of
telephoned instructions, see "Redemption of Shares -- By Telephone" above.
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<PAGE>
TRANSFER OF REGISTRATION
You may transfer the registration of any of your Fund shares to another
person by writing to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798,
Boston, Massachusetts 02208-2798. As in the case of redemptions, the written
request must be received in good order before any transfer can be made.
Transferring the registration of shares may affect the eligibility of your
account for a given class of the Portfolio's shares and may result in
involuntary conversion or redemption of your shares. See "Purchase of Shares"
above.
VALUATION OF SHARES
The net asset value per share of a class of shares of the Portfolio is
determined by dividing the total market value of the Portfolio's investments and
other assets attributable to such class, less any liabilities attributable to
such class, by the total number of outstanding shares of such class of the
Portfolio. Net asset value is calculated separately for each class of the
Portfolio. Net asset value per share is determined as of the close of the NYSE
on each day that the NYSE is open for business. Price information on listed
securities is taken from the exchange where the security is primarily traded.
Securities listed on a U.S. securities exchange for which market quotations are
available are valued at the last quoted sale price on the day the valuation is
made. Securities listed on a foreign exchange are valued at their closing price.
Unlisted securities and listed securities not traded on the valuation date for
which market quotations are readily available are valued at a price that is
considered to best represent fair value within a range not exceeding the current
asked price nor less than the current bid price. The current bid and asked
prices are determined based on the bid and asked prices quoted on such valuation
date by reputable brokers.
Bonds and other fixed income securities are valued according to the broadest
and most representative market, which will ordinarily be the over-the-counter
market. Net asset value includes interest on fixed income securities, which is
accrued daily. In addition, bonds and other fixed income securities may be
valued on the basis of prices provided by a pricing service when such prices are
believed to reflect the fair market value of such securities. The prices
provided by a pricing service are determined without regard to bid or last sale
prices, but take into account institutional size trading in similar groups of
securities and any developments related to the specific securities. Securities
not priced in this manner are valued at the most recently quoted bid price, or
when securities exchange valuations are used, at the latest quoted sale price on
the day of valuation. If there is no such reported sale, the latest quoted bid
price will be used. Securities purchased with remaining maturities of 60 days or
less are valued at amortized cost, if it approximates market value. In the event
that amortized cost does not approximate market value, market prices as
determined above will be used.
The value of other assets and securities for which no quotations are readily
available (including restricted and unlisted foreign securities) and those
securities for which it is inappropriate to determine prices in accordance with
the above-stated procedure are determined in good faith at fair value using
methods determined by the Board of Directors. For purposes of calculating net
asset value per share, all assets and liabilities initially expressed in foreign
currencies will be translated into U.S. dollars at the mean of the bid price and
asked price of such currencies against the U.S. dollar last quoted by any major
bank.
Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends for the class. Dividends will differ by
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approximately the amount of the distribution expense accrual differential among
the classes. The net asset value of Class B shares will generally be lower than
the net asset value of the Class A shares as a result of the distribution
expense charged to Class B shares.
PERFORMANCE INFORMATION
The Fund may from time to time advertise total return for each class of the
Portfolio. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT INTENDED
TO INDICATE FUTURE PERFORMANCE. The "total return" shows what an investment in a
class of the Portfolio would have earned over a specified period of time (such
as one, five or ten years), assuming that all distributions and dividends by the
Portfolio were reinvested in the same class on the reinvestment dates during the
period. Total return does not take into account any federal or state income
taxes that may be payable on dividends and distributions or on redemption. The
Fund may also include comparative performance information in advertising or
marketing the Portfolio's shares. Such performance information may include data
from Lipper Analytical Services, Inc., other industry publications, business
periodicals, rating services and market indices.
The performance figures for Class B shares will generally be lower than
those for Class A shares because of the distribution fee charged to Class B
shares.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All income dividends and capital gains distributions for a class of shares
will automatically be reinvested in additional shares of such class at net asset
value, except that, upon written notice to the Fund or by checking off the
appropriate box in the Distribution Option Section on the Account Registration
Form, a shareholder may elect to receive income dividends and capital gains
distributions in cash. The Portfolio expects to distribute substantially all of
its net investment income in the form of annual dividends. Net realized gains,
if any, after reduction for any available tax loss carryforwards will also be
distributed annually. Confirmations of the purchase of shares of the Portfolio
through the automatic reinvestment of income dividends and capital gains
distributions will be provided, pursuant to Rule 10b-10 under the Securities
Exchange Act of 1934, as amended, on the next monthly client statement following
such purchase of shares. Consequently, confirmations of such purchases will not
be provided at the time of completion of such purchases as might otherwise be
required by Rule 10b-10.
Undistributed net investment income is included in the Portfolio's net
assets for the purpose of calculating net asset value per share. Therefore, on
the "ex-dividend" date, the net asset value per share excludes the dividend
(i.e., is reduced by the per share amount of the dividend). Dividends paid
shortly after the purchase of shares by an investor, although in effect a return
of capital, are taxable to shareholders subject to income tax.
Because of the distribution fee and any other expenses that may be
attributable to the Class B shares, the net income attributable to and the
dividends payable on Class B shares will be lower than the net income
attributable to and the dividends payable on Class A shares. As a result, the
net asset value per share of the classes of the Portfolio will differ at times.
Expenses of the Portfolio allocated to a particular class of shares thereof will
be borne on a pro rata basis by each outstanding share of that class.
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TAXES
The following summary of certain federal income tax consequences is based on
current tax laws and regulations, which may be changed by legislative, judicial,
or administrative action.
No attempt has been made to present a detailed explanation of the federal,
state, or local income tax treatment of the Portfolio or its shareholders.
Accordingly, shareholders are urged to consult their tax advisors regarding
specific questions as to federal, state and local income taxes.
The Portfolio is treated as a separate entity for federal income tax
purposes and is not combined with the Fund's other portfolios. The Portfolio
intends to qualify for the special tax treatment afforded regulated investment
companies under Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"), so that the Portfolio will be relieved of federal income tax on
that part of its net investment income and net capital gain that is distributed
to shareholders.
The Portfolio distributes substantially all of its net investment income
(including, for this purpose, net short-term capital gain) to shareholders.
Dividends from the Portfolio's net investment income are taxable to shareholders
as ordinary income, whether received in cash or reinvested in additional shares.
Such dividends paid by the Portfolio will generally not qualify for the 70%
dividends-received deduction for corporate shareholders. The Portfolio will
report annually to its shareholders the amount of dividend income qualifying for
such treatment.
Distributions of net capital gains (i.e., net long-term capital gains in
excess of net short-term capital losses) are taxable to shareholders as
long-term capital gains, regardless of how long the shareholder has held the
Portfolio's shares. The Portfolio sends reports annually to shareholders of the
federal income tax status of all distributions made during the preceding year.
The Portfolio intends to make sufficient distributions or deemed
distributions of its ordinary income and capital gain net income (the excess of
short-term and long-term capital gains over short-term and long-term capital
losses), including any available capital loss carryforwards, prior to the end of
each calendar year to avoid liability for federal excise tax.
Dividends and other distributions declared by the Portfolio in October,
November or December of any year and payable to shareholders of record on a date
in such month will be deemed to have been paid by the Portfolio and received by
the shareholders on December 31 of that year if the distributions are paid by
the Portfolio at any time during the following January.
The sale, exchange or redemption of shares may result in taxable gain or
loss to the selling, exchanging or redeeming shareholder, depending upon whether
the fair market value of the redemption proceeds exceeds or is less than the
shareholder's adjusted basis in the redeemed, exchanged or sold shares. If
capital gain distributions have been made with respect to shares that are sold
at a loss after being held for six months or less, then the loss is treated as a
long-term capital loss to the extent of the capital gain distributions.
The conversion of Class A shares to Class B shares should not be a taxable
event to the shareholder.
Shareholders are urged to consult with their tax advisers concerning the
application of state and local income taxes to investments in the Portfolio,
which may differ from the federal income tax consequences described above.
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Investment income received by the Portfolio from sources within foreign
countries may be subject to foreign income taxes withheld at the source. To the
extent that the Portfolio is liable for foreign income taxes so withheld, the
Portfolio intends to operate so as to meet the requirements of the Code to pass
through to the shareholders credit for foreign income taxes paid. Although the
Portfolio intends to meet Code requirements to pass through credit for such
taxes, there can be no assurance that the Portfolio will be able to do so.
THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED HEREIN FOR GENERAL
INFORMATION ONLY. PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS
WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN THE PORTFOLIO.
PORTFOLIO TRANSACTIONS
The Investment Advisory Agreement authorizes the Adviser to select the
brokers or dealers that will execute the purchases and sales of investment
securities for the Portfolio and directs the Adviser to use its best efforts to
obtain the best available price and most favorable execution with respect to all
transactions for the Portfolio. The Fund has authorized the Adviser to pay
higher commissions in recognition of brokerage services which, in the opinion of
the Adviser, are necessary for the achievement of better execution, provided the
Adviser believes this to be in the best interest of the Fund.
Since shares of the Portfolio are not marketed through intermediary brokers
or dealers, it is not the Fund's practice to allocate brokerage or principal
business on the basis of sales of shares which may be made through such firms.
However, the Adviser may place portfolio orders with qualified broker-dealers
who recommend the Fund's portfolios or who act as agents in the purchase of
shares of the Fund's portfolios for their clients.
In purchasing and selling securities for the Portfolio, it is the Fund's
policy to seek to obtain quality execution at the most favorable prices, through
responsible broker-dealers. In selecting broker-dealers to execute the
securities transactions for the Portfolio, consideration will be given to such
factors as the price of the security, the rate of the commission, the size and
difficulty of the order, the reliability, integrity, financial condition,
general execution and operational capabilities of competing broker-dealers, and
the brokerage and research services which they provide to the Fund. Some
securities considered for investment by the Portfolio may also be appropriate
for other clients served by the Adviser. If purchase or sale of securities
consistent with the investment policies of the Portfolio and one or more of
these other clients served by the Adviser is considered at or about the same
time, transactions in such securities will be allocated among the Portfolio and
clients in a manner deemed fair and reasonable by the Adviser. Although there is
no specified formula for allocating such transactions, the various allocation
methods used by the Adviser, and the results of such allocations, are subject to
periodic review by the Fund's Board of Directors.
Subject to the overriding objective of obtaining the best possible execution
of orders, the Adviser may allocate a portion of each portfolio's brokerage
transactions to Morgan Stanley or broker affiliates of Morgan Stanley. In order
for Morgan Stanley or its affiliates to effect any portfolio transactions for
the Fund, the commissions, fees or other remuneration received by Morgan Stanley
or such affiliates must be reasonable and fair compared to the commissions, fees
or other remuneration paid to other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time. Furthermore, the Board
of Directors of the Fund, including a majority of the
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Directors who are not "interested persons," have adopted procedures which are
reasonably designed to provide that any commissions, fees or other remuneration
paid to Morgan Stanley or such affiliates are consistent with the foregoing
standard.
Portfolio securities will not be purchased from, or through, or sold to or
through, the Adviser or Morgan Stanley or any "affiliated persons," as defined
in the Investment Company Act of 1940, as amended (the "1940 Act"), of Morgan
Stanley when such entities are acting as principals, except to the extent
permitted by law.
Although the Portfolio will not invest for short-term trading purposes,
investment securities may be sold from time to time without regard to the length
of time they have been held. It is anticipated that the annual turnover rate of
the Portfolio will not exceed 100% in normal circumstances.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
The Fund was organized as a Maryland corporation on June 16, 1988. The
Articles of Incorporation, as amended and restated, permit the Fund to issue up
to 34 billion shares of common stock, with $.001 par value per share. Pursuant
to the Fund's Articles of Incorporation, the Board of Directors may increase the
number of shares the Fund is authorized to issue without the approval of the
shareholders of the Fund. Subject to the notice period to shareholders with
respect to shares held by shareholders, the Board of Directors has the power to
designate one or more classes of shares of common stock and to classify and
reclassify any unissued shares with respect to such classes. The shares of
common stock of each portfolio are currently classified into two classes, the
Class A shares and the Class B shares, except for the International Small Cap,
Money Market and Municipal Money Market Portfolios, which only offer Class A
shares.
The shares of the Portfolio, when issued, will be fully paid, nonassessable,
fully transferable and redeemable at the option of the holder. The shares have
no preference as to conversion, exchange, dividends, retirement or other
features and have no preemptive rights. The shares of the Portfolio have
non-cumulative voting rights, which means that the holders of more than 50% of
the shares voting for the election of Directors can elect 100% of the Directors
if they choose to do so. Persons or organizations owning 25% or more of the
outstanding shares of a portfolio may be presumed to "control" (as that term is
defined in the 1940 Act) that Portfolio. Under Maryland law, the Fund is not
required to hold an annual meeting of its shareholders unless required to do so
under the 1940 Act.
REPORTS TO SHAREHOLDERS
The Fund will send to its shareholders annual and semi-annual reports; the
financial statements appearing in annual reports are audited by independent
accountants. Monthly unaudited portfolio data is also available from the Fund
upon request.
In addition, the Adviser or its agent, as Transfer Agent, will send to each
shareholder having an account directly with the Fund a monthly statement showing
transactions in the account, the total number of shares owned, and any dividends
or distributions paid.
CUSTODIAN
As of September 1, 1995, domestic securities and cash are held by Chase,
which replaced U.S. Trust as the Fund's domestic custodian. Chase is not an
affiliate of the Adviser or the Distributor. Morgan Stanley Trust
29
<PAGE>
Company, Brooklyn, New York ("MSTC"), an affiliate of the Adviser and the
Distributor, acts as the Fund's custodian for foreign assets held outside the
United States and employs subcustodians approved by the Board of Directors of
the Fund in accordance with regulations of the Securities and Exchange
Commission for the purpose of providing custodial services for such assets. MSTC
may also hold certain domestic assets for the Fund. For more information on the
custodians, see "General Information -- Custody Arrangements" in the Statement
of Additional Information.
DIVIDEND DISBURSING AND TRANSFER AGENT
Chase Global Funds Services Company, 73 Tremont Street, Boston,
Massachusetts 02108-3913, acts as Dividend Disbursing and Transfer Agent for the
Fund.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP serves as independent accountants for the Fund and
audits its annual financial statements.
LITIGATION
The Fund is not involved in any litigation.
30
<PAGE>
<TABLE>
<CAPTION>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
ACTIVE COUNTRY ALLOCATION PORTFOLIO
P.O. BOX 2798, BOSTON, MA 02208-2798
- ---------------------------------------------------------------------------------------------------------------
ACCOUNT REGISTRATION FORM
- ---------------------------------------------------------------------------------------------------------------
<S> <C>
ACCOUNT INFORMATION If you need assistance in filling out this form
Fill in where applicable for the Morgan Stanley Institutional Fund, please
contact your Morgan Stanley representative or call
us toll free 1-(800)-548-7786. Please print all
items except signature, and mail to the Fund at the
address above.
- ---------------------------------------------------------------------------------------------------------------
A) REGISTRATION
1. INDIVIDUAL 1. / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
First Name Initial Last Name
2. JOINT TENANTS 2. / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
(RIGHTS OF First Name Initial Last Name
SURVIVORSHIP / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
PRESUMED UNLESS First Name Initial Last Name
TENANCY IN COMMON
IS INDICATED)
- ---------------------------------------------------------------------------------------------------------------
3. CORPORATIONS, 3. / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
TRUSTS AND OTHERS
Please call the / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
Fund for additional
documents that may / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
be required to set
up account and to
authorize transactions.
Type of / / INCORPORATED / / UNINCORPORATED / / PARTNERSHIP / / UNIFORM GIFT/TRANSFER TO MINOR
Registration: ASSOCIATION (ONLY ONE CUSTODIAN AND MINOR PERMITTED)
/ / TRUST __________________________________ / / OTHER (Specify) ______________________________
- ---------------------------------------------------------------------------------------------------------------
B) MAILING ADDRESS Street or P.O. Box / / / / / / / / / / / / / / / / / / / / / / / / / / / /
Please fill in
completely, including City / / / / / / / / / / / / / State / / / Zip / / / / / /-/ / / / / / / /
telephone number(s).
Home Business
Telephone No./ / / /-/ / / /-/ / / / / Telephone No./ / / /-/ / / /-/ / / /
/ / United States / / Resident / /Non-Resident Alien:
Citizen Alien Indicate Country of Residence _________
- ---------------------------------------------------------------------------------------------------------------
C) TAXPAYER PART 1. Enter your Taxpayer C) IMPORTANT TAX INFORMATION
IDENTIFICATION Identification Number. For most You (as a payee) are required by
NUMBER individual taxpayers, this is your law to provide us (as payer) with
If the account is in Social Security Number. your correct Taxpayer Identification
more than one name, TAXPAYER IDENTIFICATION NUMBER Number. Accounts that have a missing
CIRCLE THE NAME OF THE / / / /-/ / / / / / / / / or incorrect Taxpayer Identification
PERSON WHOSE TAXPAYER OR Number will be subject to backup
IDENTIFICATION NUMBER SOCIAL SECURITY NUMBER withholding at a 31% rate on dividends,
IS PROVIDED IN SECTION / / / /-/ / /-/ / / / / distributions and other payments.
A) ABOVE. If no name PART 2. BACKUP WITHHOLDING If you have not provided us with
is circled, the number / / Check this box if you are your correct taxpayer identification
will be considered to be NOT subject to Backup number, you may be subject to
that of the last name Withholding under the a $50 penalty imposed by the Internal
listed. For Custodian provisions of Section Revenue Service.
account of a minor 3406(a)(1)(C) of the Internal Backup withholding is not an
(Uniform Gift/Transfer Revenue Code. additional tax; the tax liability of
to Minor Act), give the persons subject to backup withholding
Social Security Number will be reduced by the amount of tax
of the minor. withheld. If withholding results in
an overpayment of taxes, a refund
may be obtained. You may be notified
that you are subject to backup
withholding under Section 3406(a)(1)(C)
of the Internal Revenue Code because you
have underreported interest or dividends
or you were required to but failed to
file a return which would have included a
reportable interest or dividend payment. IF
YOU HAVE NOT BEEN SO NOTIFIED, CHECK THE
BOX IN PART 2 AT LEFT.
- ---------------------------------------------------------------------------------------------------------------
D) PORTFOLIO AND For Purchase of the following Portfolio(s):
CLASS SELECTION Active Country Allocation Portfolio / / Class A Shares $____ / / Class B Shares $____
(Class A shares
minimum $500,000
for each Portfolio Total Initial Investment $_____________
and Class B shares
minimum $100,000 for
each Portfolio).
Please indicate
class and amount.
- ---------------------------------------------------------------------------------------------------------------
E) METHOD OF Payment by:
INVESTMENT / / Check (MAKE CHECK PAYABLE TO MORGAN STANLEY INSTITUTIONAL FUND, INC.--ACTIVE COUNTRY ALLOCATION PORTFOLIO)
Please
indicate
manner of / / Exchange $____________ From________________ / / / / / / / / / / /-/ /
payment. Name of Portfolio Account No.
/ / Account previously established by:
/ / Phone exchange / / Wire on___________________ / / / / / / / / / / / /-/ /
Date Account No. (Check
(Previously assigned by the Fund) Digit)
<PAGE>
- ---------------------------------------------------------------------------------------------------------------
F) DISTRIBUTION Income dividends and capital gains distributions (if any) will
OPTION be reinvested in additional shares unless either box below is
checked.
/ / Income dividends to be paid in cash, capital
gains distributions (if any) in shares.
/ / Income dividends and capital gains distributions
(if any) to be paid in cash.
- ---------------------------------------------------------------------------------------------------------------
G) TELEPHONE / / I/we hereby authorize the Fund and its ______________________ ________________
REDEMPTION agents to honor any telephone requests Name of COMMERCIAL Bank Bank Account No.
Please select at time of to wire redemption proceeds to the (Not Savings Bank)
initial application if you commercial bank indicated at rightand/or
wish to redeem shares by mail redemption proceeds to the name and ________________
telephone. A SIGNATURE address in which my/our fund account is Bank ABA No.
GUARANTEE IS REQUIRED IF registered if such requests are believed
BANK ACCOUNT IS NOT to be authentic. _________________________________________________
REGISTERED IDENTICALLY TO The Fund and the Fund's Transfer Agent will Name(s) in which your BANK Account is Established
YOUR FUND ACCOUNT. employ reasonable procedures to confirm that
instructions communicated by telephone are _________________________________________________
TELEPHONE REQUESTS FOR genuine. These procedures include requiring Bank's Street Address
REDEMPTIONS WILL NOT BE the investor to provide certain personal
HONORED UNLESS THE BOX IS identification information at the time an _________________________________________________
CHECKED. account is opened and prior to effecting each City State Zip
transaction requested by telephone. In addition,
all telephone transaction requests will be recorded
and investors may be required to provide additional
telecopied written instructions of transaction
requests. Neither the Fund nor the Transfer Agent will
be responsible for any loss, liability, cost or expense
for following instructions received by telephone that
it reasonably believes to be genuine.
- ---------------------------------------------------------------------------------------------------------------
H) INTERESTED PARTY
OPTION
In addition to the account _________________________________________________________________
statement sent to my/our Name
registered address, I/we _________________________________________________________________
hereby authorize the fund
to mail duplicate _________________________________________________________________
statements to the name and Address
address provided at right.
_________________________________________________________________
City State Zip Code
- ---------------------------------------------------------------------------------------------------------------
I) DEALER
INFORMATION _______________________ _______________________________ ___________
Representative Name Representative No. Branch No.
- ---------------------------------------------------------------------------------------------------------------
J) SIGNATURE OF The undersigned certify(ies) that I/we have full authority and legal
ALL HOLDERS capacity to purchase and redeem shares of the Fund and affirm that I/we
AND TAXPAYER have received a current Prospectus of the Morgan Stanley Institutional
CERTIFICATION Fund, Inc. and agree to be bound by its terms. UNDER THE PENALTIES OF
Sign Here > PERJURY, I/WE CERTIFY THAT THE INFORMATION PROVIDED IN SECTION C)
ABOVE IS TRUE, CORRECT AND COMPLETE.
(X) (X)
__________________________________ ______________________________________
Signature Date Signature Date
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
(This page has been left blank intentionally.)
<PAGE>
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND OR THE DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER BY THE FUND OR THE DISTRIBUTOR TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION.
--------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
PAGE
----
Fund Expenses..................................... 2
Financial Highlights.............................. 4
Prospectus Summary................................ 6
Investment Objective and Policies................. 10
Additional Investment Information................. 12
Investment Limitations............................ 15
Management of the Fund............................ 15
Purchase of Shares................................ 18
Redemption of Shares.............................. 22
Shareholder Services.............................. 24
Valuation of Shares............................... 25
Performance Information........................... 26
Dividends and Capital Gains Distributions......... 26
Taxes............................................. 27
Portfolio Transactions............................ 28
General Information............................... 29
Account Registration Form
</TABLE>
ACTIVE COUNTRY ALLOCATION PORTFOLIO
A PORTFOLIO OF THE
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
Common Stock
($.001 PAR VALUE)
-------------
PROSPECTUS
-------------
Investment Adviser
Morgan Stanley
Asset Management Inc.
Distributor
Morgan Stanley & Co.
Incorporated
- ---------------------------------
- ---------------------------------
- ---------------------------------
- ---------------------------------
<PAGE>
- --------------------------------------------------------------------------------
P R O S P E C T U S
----------------------------------------------------------------------
GOLD PORTFOLIO
A PORTFOLIO OF THE
MORGAN STANLEY INSTITUTIONAL FUND, INC.
P.O. BOX 2798, BOSTON, MASSACHUSETTS 02208-2798
FOR INFORMATION CALL 1-800-548-7786
----------------
Morgan Stanley Institutional Fund, Inc. (the "Fund") is a no-load, open-end
management investment company, or mutual fund, which offers redeemable shares in
a series of diversified and non-diversified investment portfolios
("portfolios"). The Fund currently consists of twenty-eight portfolios
representing a broad range of investment choices. The Fund is designed to
provide clients with attractive alternatives for meeting their investment needs.
This prospectus (the "Prospectus") pertains to the Class A and the Class B
shares of the Gold Portfolio (the "Portfolio"). On January 2, 1996, the
Portfolio began offering two classes of shares, the Class A shares and the Class
B shares, except for the Money Market, Municipal Money Market and International
Small Cap Portfolios which only offer Class A shares. All shares of the
Portfolio owned prior to January 2, 1996 were redesignated Class A shares on
January 2, 1996. The Class A and Class B shares currently offered by the
Portfolio have different minimum investment requirements and fund expenses.
Shares of the portfolios are offered with no sales charge or exchange or
redemption fee (with the exception of the International Small Cap Portfolio).
The GOLD PORTFOLIO seeks to provide long-term capital appreciation by
investing primarily in the equity securities of foreign and domestic issuers
engaged in gold-related activities.
INVESTORS SHOULD NOTE THAT THE PORTFOLIO MAY INVEST UP TO 10% OF ITS TOTAL
ASSETS IN RESTRICTED SECURITIES, AND IT MAY INVEST UP TO 20% OF ITS TOTAL ASSETS
IN RESTRICTED SECURITIES THAT ARE RULE 144A SECURITIES. SEE "ADDITIONAL
INVESTMENT INFORMATION -- NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND
RESTRICTED SECURITIES." INVESTMENTS IN EXCESS OF 5% OF THE PORTFOLIO'S TOTAL
ASSETS MAY BE CONSIDERED A SPECULATIVE ACTIVITY, MAY INVOLVE GREATER RISK, AND
MAY INCREASE THE PORTFOLIO'S EXPENSES.
The Fund is designed to meet the investment needs of discerning investors
who place a premium on quality and personal service. With Morgan Stanley Asset
Management Inc. as Adviser and Administrator (the "Adviser" and the
"Administrator"), and with Morgan Stanley & Co. Incorporated ("Morgan Stanley")
as Distributor, the Fund makes available to institutional investors and high net
worth individual investors a series of portfolios which benefit from the
investment expertise and commitment to excellence associated with Morgan Stanley
and its affiliates.
This Prospectus is designed to set forth concisely the information about the
Fund that a prospective investor should know before investing and it should be
retained for future reference. The Fund offers additional portfolios which are
described in other prospectuses and under "Prospectus Summary" below. The Fund
currently offers the following portfolios: (i) GLOBAL AND INTERNATIONAL EQUITY
- -- Active Country Allocation, Asian Equity, Emerging Markets, European Equity,
Global Equity, Gold, International Equity, International Magnum, International
Small Cap, Japanese Equity and Latin American Portfolios; (ii) U.S. EQUITY --
Aggressive Equity, Emerging Growth, Equity Growth, MicroCap, Small Cap Value
Equity, U.S. Real Estate and Value Equity Portfolios; (iii) EQUITY AND FIXED
INCOME -- Balanced Portfolio; (iv) FIXED INCOME -- Emerging Markets Debt, Fixed
Income, Global Fixed Income, High Yield, Mortgage-Backed Securities and
Municipal Bond Portfolios; and (v) MONEY MARKET -- Money Market and Municipal
Money Market Portfolios. Additional information about the Fund is contained in a
"Statement of Additional Information," dated May 1, 1996, which is incorporated
herein by reference. The Statement of Additional Information and the
prospectuses pertaining to the other portfolios of the Fund are available upon
request and without charge by writing or calling the Fund at the address and
telephone number set forth above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1996.
<PAGE>
FUND EXPENSES
The following table illustrates the expenses and fees that a shareholder of
the Gold Portfolio will incur:
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
- --------------------------------------------------------------------------------------------
<S> <C>
Maximum Sales Load Imposed on Purchases
Class A................................................................................... None
Class B................................................................................... None
Maximum Sales Load Imposed on Reinvested Dividends
Class A................................................................................... None
Class B................................................................................... None
Deferred Sales Load
Class A................................................................................... None
Class B................................................................................... None
Redemption Fees
Class A................................................................................... None
Class B................................................................................... None
Exchange Fees
Class A................................................................................... None
Class B................................................................................... None
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- --------------------------------------------------------------------------------------------
<S> <C>
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fee (Net of Fee Waiver)*
Class A................................................................................... 0.49%
Class B................................................................................... 0.49%
12b-1 Fees
Class A................................................................................... None
Class B................................................................................... 0.25%
Other Expenses
Class A................................................................................... 0.76%
Class B................................................................................... 0.76%
---------
Total Operating Expenses (Net of Fee Waivers)*
Class A................................................................................... 1.25%
Class B................................................................................... 1.50%
---------
---------
</TABLE>
- ------------------------------
*The Adviser has agreed to waive its management fees and/or to reimburse the
Portfolio, if necessary, if such fees would cause the Portfolio's total annual
operating expenses, as a percentage of average daily net assets, to exceed the
percentages set forth in the table above. Absent the fee waiver, the management
fee would be 1.00%. Absent the fee waiver and/or expense reimbursement, the
Portfolio's total operating expenses would be 1.76% of the average daily net
assets of the Class A shares and 2.01% of the average daily net assets of the
Class B shares. As a result of this reduction, the Management Fee stated above
is lower than the contractual fee stated under "Management of the Fund." The
Adviser reserves the right to terminate any of its fee waivers and/or expense
reimbursements at any time in its sole discretion. For further information on
Fund expenses, see "Management of the Fund."
The purpose of the table above is to assist the investor in understanding
the various expenses that an investor in the Portfolio will bear directly or
indirectly. The Class A expenses and fees for the Portfolio are based
2
<PAGE>
on actual figures for the fiscal year ended December 31, 1995. The Class B
expenses and fees for the Portfolio are based on estimates, assuming that the
average daily net assets of the Class B shares of the Portfolio will be
$50,000,000. "Other Expenses" include Board of Directors' fees and expenses,
amortization of organizational costs, filing fees, professional fees and costs
for shareholder reports. Due to the continuous nature of Rule 12b-1 fees, long
term Class B shareholders may pay more than the equivalent of the maximum
front-end sales charges otherwise permitted by the Rules of Fair Practice of the
National Association of Securities Dealers, Inc. ("NASD").
The following example illustrates the expenses that you would pay on a
$1,000 investment assuming (1) a 5% annual rate of return and (2) redemption at
the end of each time period. As noted in the table above, the Portfolio charges
no redemption fees of any kind. The example is based on total operating expenses
of the Portfolio after fee waivers.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Gold Portfolio
Class A.......................................................... $ 13 $ 40 $ 69 $ 151
Class B.......................................................... 15 47 82 179
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
The Fund intends to comply with all state laws that restrict investment
company expenses. Currently, the most restrictive state law requires that the
aggregate annual expenses of an investment company shall not exceed two and
one-half percent (2 1/2%) of the first $30 million of average net assets, two
percent (2%) of the next $70 million of average net assets, and one and one-half
percent (1 1/2%) of the remaining net assets of such investment company.
The Adviser has agreed to a reduction in the amounts payable to it, and to
reimburse the Portfolio, if necessary, if in any fiscal year the sum of the
Portfolio's expenses exceeds the limit set by applicable state law. If the
Adviser is required to so reduce its fee or reimburse the Portfolio, the
Sub-Adviser has agreed to a proportionate waiver of its fee payable from the
Adviser or reimbursement of expenses.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following table provides financial highlights for the Class A shares of
the Portfolio for each of the periods described. The audited financial
highlights for the Class A shares for the fiscal year ended December 31, 1995
are part of the Fund's financial statements which appear in the Fund's December
31, 1995 Annual Report to Shareholders and which are included in the Fund's
Statement of Additional Information. The Portfolio's financial highlights for
each of the periods presented have been audited by Price Waterhouse LLP, whose
unqualified report thereon is also included in the Statement of Additional
Information. Additional performance information for the Class A shares is
included in the Annual Report. The Annual Report and the financial statements
therein, along with the Statement of Additional Information, are available at no
cost from the Fund at the address and telephone number noted on the cover page
of this Prospectus. Financial highlights are not available for the new Class B
shares since they were not offered as of December 31, 1995. The following
information should be read in conjunction with the financial statements and
notes thereto.
4
<PAGE>
GOLD PORTFOLIO
<TABLE>
<CAPTION>
PERIOD FROM FEBRUARY
1, 1994* TO YEAR ENDED
DECEMBER 31, 1994 DECEMBER 31, 1995
--------------------- -----------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.............. $ 10.00 $ 9.13
------- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income/(Loss) (1)................ 0.03 (0.07)
Net Realized and Unrealized Gain/(Loss) on
Investments.................................... (0.88) 1.22
------- ------
Total from Investment Operations.............. (0.85) 1.15
------- ------
DISTRIBUTIONS
Net Investment Income........................... (0.02) (0.01)
Net Realized Gain............................... -- (1.72)
------- ------
Total Distributions........................... (0.02) (1.73)
------- ------
NET ASSET VALUE, END OF PERIOD.................... $ 9.13 $ 8.55
------- ------
------- ------
TOTAL RETURN...................................... (8.49)% 13.21%
------- ------
------- ------
RATIO AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)............. $30,243 $7,409
Ratio of Expenses to Average Net Assets (1)(2).... 1.25%** 1.25%
Ratio of Net Investment Income/(Loss) to Average
Net Assets (1)(2)................................ 0.41%** (0.31)%
Portfolio Turnover Rate........................... 56% 47%
- ------------------------
(1) Effect of voluntary expense limitation during
the period:
Per share benefit to net investment income... $ 0.04 $ 0.11
Ratios before expense limitation:
Expenses to Average Net Assets............... 1.72%** 1.76%
Net Investment Loss to Average Net Assets.... (0.06)%** (0.82)%
</TABLE>
(2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled
to receive an investment advisory fee calculated at an annual rate of 1.00%
of the average daily net assets of the Portfolio. The Adviser has agreed to
waive a portion of this fee and/or reimburse expenses of the Portfolio to
the extent that the total operating expenses of the Portfolio exceed 1.25%
of the average daily net assets of the Class A shares and 1.50% of the
average daily net assets of the Class B shares. In the periods ended
December 31, 1994 and December 31, 1995, the Adviser waived advisory fees
and/or reimbursed expenses totaling $55,000 and $55,000, respectively, for
the Portfolio.
* Commencement of Operations.
** Annualized.
5
<PAGE>
PROSPECTUS SUMMARY
THE FUND
The Fund consists of twenty-eight portfolios, offering institutional
investors and high net worth individual investors a broad range of investment
choices coupled with the advantages of a no-load mutual fund with Morgan Stanley
and its affiliates providing customized services as Adviser, Administrator and
Distributor. Each portfolio offers Class A shares and, except the International
Small Cap, Money Market and Municipal Money Market Portfolios, also offers Class
B shares. Each portfolio has its own investment objective and policies designed
to meet its specific goals. The investment objective of the Gold Portfolio is as
follows:
- The GOLD PORTFOLIO seeks to provide long-term capital appreciation by
investing primarily in the equity securities of foreign and domestic
issuers engaged in gold-related activities. The other portfolios of the
Fund are described in other prospectuses which may be obtained from the
Fund at the address and telephone number noted on the cover page of this
Prospectus. The objectives of these other portfolios are listed below:
GLOBAL AND INTERNATIONAL EQUITY:
- The ACTIVE COUNTRY ALLOCATION PORTFOLIO seeks long-term capital
appreciation by investing in accordance with country weightings determined
by the Adviser in equity securities of non-U.S. issuers which, in the
aggregate, replicate broad country indices.
- The ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Asian issuers.
- The CHINA GROWTH PORTFOLIO seeks to provide long-term capital appreciation
by investing primarily in the equity securities of issuers in The People's
Republic of China, Hong Kong and Taiwan.
- The EMERGING MARKETS PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of emerging country issuers.
- The EUROPEAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of European issuers.
- The GLOBAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of issuers throughout the world,
including U.S. issuers.
- The INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers.
- The INTERNATIONAL MAGNUM PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers in accordance
with EAFE country (as defined in "Investment Objective and Policies"
below) weightings determined by the Adviser.
- The INTERNATIONAL SMALL CAP PORTFOLIO seeks long-term capital appreciation
by investing primarily in equity securities of non-U.S. issuers with
equity market capitalizations of less than $1 billion.
6
<PAGE>
- The JAPANESE EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Japanese issuers.
- The LATIN AMERICAN PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Latin American issuers and
debt securities issued or guaranteed by Latin American governments or
governmental entities.
U.S. EQUITY:
- The AGGRESSIVE EQUITY PORTFOLIO seeks capital appreciation by investing
primarily in corporate equity and equity-linked securities.
- The EMERGING GROWTH PORTFOLIO seeks long-term capital appreciation by
investing primarily in growth-oriented equity securities of
small-to-medium sized corporations.
- The EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation by
investing in growth-oriented equity securities of medium and large
capitalization companies.
- The MICROCAP PORTFOLIO seeks long-term capital appreciation by investing
primarily in growth-oriented equity securities of small corporations.
- The SMALL CAP VALUE EQUITY PORTFOLIO seeks high long-term total return by
investing in undervalued equity securities of small-to-medium sized
companies.
- The U.S. REAL ESTATE PORTFOLIO seeks to provide above average current
income and long-term capital appreciation by investing primarily in equity
securities of companies in the U.S. real estate industry, including real
estate investment trusts.
- The VALUE EQUITY PORTFOLIO seeks high total return by investing in equity
securities which the Adviser believes to be undervalued relative to the
stock market in general at the time of purchase.
EQUITY AND FIXED INCOME:
- The BALANCED PORTFOLIO seeks high total return while preserving capital by
investing in a combination of undervalued equity securities and fixed
income securities.
FIXED INCOME:
- The EMERGING MARKETS DEBT PORTFOLIO seeks high total return by investing
primarily in debt securities of government, government-related and
corporate issuers in emerging countries.
- The FIXED INCOME PORTFOLIO seeks to produce a high total return consistent
with the preservation of capital by investing in a diversified portfolio
of fixed income securities.
- The GLOBAL FIXED INCOME PORTFOLIO seeks to produce an attractive real rate
of return while preserving capital by investing in fixed income securities
of issuers throughout the world, including U.S. issuers.
- The HIGH YIELD PORTFOLIO seeks to maximize total return by investing in a
diversified portfolio of high yield fixed income securities that offer a
yield above that generally available on debt securities in the three
highest rating categories of the recognized rating services.
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- The MORTGAGE-BACKED SECURITIES PORTFOLIO seeks to produce as high a level
of current income as is consistent with the preservation of capital by
investing primarily in a variety of investment-grade mortgage-backed
securities.
- The MUNICIPAL BOND PORTFOLIO seeks to produce a high level of current
income consistent with preservation of principal through investment
primarily in municipal obligations, the interest on which is exempt from
federal income tax.
MONEY MARKET:
- The MONEY MARKET PORTFOLIO seeks to maximize current income and preserve
capital while maintaining high levels of liquidity through investing in
high quality money market instruments with remaining maturities of one
year or less.
- The MUNICIPAL MONEY MARKET PORTFOLIO seeks to maximize current tax-exempt
income and preserve capital while maintaining high levels of liquidity
through investing in high quality money market instruments with remaining
maturities of one year or less which are exempt from federal income tax.
INVESTMENT MANAGEMENT
Morgan Stanley Asset Management Inc., a wholly owned subsidiary of Morgan
Stanley Group Inc., which, together with its affiliated asset management
companies, at March 31, 1996 had approximately $57.4 billion in assets under
management as an investment manager or as a fiduciary adviser, acts as
investment adviser to the Fund and each of its portfolios. Sun Valley Gold
Company (the "Sub-Adviser"), which at March 31, 1996 had approximately $192
million in assets under management, acts as sub-adviser to the Portfolio. See
"Management of the Fund -- Investment Adviser and Sub-Adviser" and "Management
of the Fund -- Administrator."
HOW TO INVEST
Class A shares of the Portfolio are offered directly to investors at net
asset value with no sales commission or 12b-1 charges. Class B shares of the
Portfolio are offered at net asset value with no sales commission, but with a
12b-1 fee, which is accrued daily and paid quarterly, equal to 0.25% of the
Class B shares' average daily net assets on an annualized basis. Share purchases
may be made by sending investments directly to the Fund or through the
Distributor. Shares in a Portfolio account opened prior to January 2, 1996
(each, a "Pre-1996 Account") were designated Class A shares on January 2, 1996.
For a Portfolio account opened on or after January 2, 1996 (a "New Account"),
the minimum initial investment is $500,000 for Class A shares and $100,000 for
Class B shares. Certain exceptions to the foregoing minimums apply to (1) shares
in a Pre-1996 Account with a value of $100,000 or more on March 1, 1996 (a
"Grandfathered Class A Account"); (2) Portfolio accounts held by officers of the
Adviser and its affiliates; and (3) certain advisory or asset allocation
accounts, such as Total Funds Management accounts, managed by Morgan Stanley or
its affiliates, including the Adviser ("Managed Accounts"). The Adviser reserves
the right in its sole discretion to determine which of such advisory or asset
allocation accounts shall be Managed Accounts. For information regarding Managed
Accounts, please contact your Morgan Stanley account representative or the Fund
at the telephone number provided on the cover of this Prospectus. Shares in a
Pre-1996 Account with a value of less than $100,000 on March 1, 1996 (a
"Grandfathered Class B Account") converted to Class B shares on March 1, 1996.
The minimum investment levels may be waived at the discretion of the Adviser for
(i) certain employees and customers of Morgan Stanley or its affiliates and
certain trust departments, brokers, dealers, agents, financial planners,
financial services firms, or investment
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advisers that have entered into an agreement with Morgan Stanley or its
affiliates; and (ii) retirement and deferred compensation plans and trusts used
to fund such plans, including, but not limited to, those defined in Section
401(a), 403(b) or 457 of the Internal Revenue Code of 1986, as amended, and
"rabbi trusts". See "Purchase of Shares -- Minimum Investment and Account Sizes;
Conversion from Class A to Class B Shares."
The minimum subsequent investment for a Portfolio account is $1,000 (except
for automatic reinvestment of dividends and capital gains distributions for
which there is no minimum). Such subsequent investments will be applied to
purchase additional shares in the same class held by a shareholder in a
Portfolio account. See "Purchase of Shares -- Additional Investments."
HOW TO REDEEM
Class A shares or Class B shares of the Portfolio may be redeemed at any
time, without cost, at the net asset value per share of shares of the applicable
class next determined after receipt of the redemption request. The redemption
price may be more or less than the purchase price. Certain redemptions may cause
involuntary redemption or automatic conversion. Class A or Class B shares held
in New Accounts are subject to involuntary redemption if shareholder
redemption(s) of such shares reduces the value of such account to less than
$100,000 for a continuous 60-day period. Involuntary redemption does not apply
to Managed Accounts, Grandfathered Class A Accounts and Grandfathered Class B
Accounts, regardless of the value of such accounts. Class A shares in a New
Account will convert to Class B shares if shareholder redemption(s) of such
shares reduces the value of such account to less than $500,000 for a continuous
60-day period. Class B shares in a New Account will convert to Class A shares if
shareholder purchases of additional Class B shares or market activity causes the
value of the Class B shares in the New Account to increase to $500,000 or more.
See "Purchase of Shares -- Minimum Account Sizes and Involuntary Redemption of
Shares" and "Redemption of Shares."
RISK FACTORS
The investment policies of the Portfolio entail certain risks and
considerations of which an investor should be aware. The Portfolio's investments
may be subject to greater risk and market fluctuation than a fund that invests
in securities representing a broader range of investment alternatives.
Historically, stock prices of companies involved in precious metals-related
industries have been volatile. In addition, prices of gold and other precious
metals and minerals may fluctuate sharply over short periods of time due to
various world-wide economic, financial and political factors. The Portfolio may
also invest in securities of foreign issuers which are subject to certain risks
not typically associated with domestic securities. See "Investment Objective and
Policies." In addition, the Portfolio may invest in repurchase agreements, lend
its portfolio securities and purchase securities on a when-issued basis. The
Portfolio may invest in forward foreign currency exchange contracts to hedge
currency risk associated with investment in non-U.S. dollar denominated
securities and may purchase and sell options and enter into futures transactions
and options thereon for hedging purposes. The Portfolio may invest in short-term
or medium-term debt securities or hold cash or cash equivalents for temporary
defensive purposes. The Portfolio may also invest in securities that are neither
listed on a stock exchange nor traded over-the-counter, including private
placement securities. The Portfolio may also invest indirectly in securities
through sponsored or unsponsored American Depositary Receipts. Each of these
investment strategies involves specific risks which are described under
"Investment Objectives and Policies" and "Additional Investment Information"
herein and under "Investment Objective and Policies" in the Statement of
Additional Information.
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INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Gold Portfolio is long-term capital
appreciation. The production of any current income is incidental to this
objective. The Portfolio seeks to achieve its objective by investing primarily
in the equity securities of foreign and domestic issuers principally engaged in
gold-related activities. There can be no assurance that the Portfolio's
investment objective will be achieved. The Portfolio's investment objective is a
fundamental policy which may not be changed without the approval of a majority
of the Portfolio's outstanding voting securities. Because the securities in
which the Portfolio invests may involve risks not associated with more
traditional investments, an investment in the Portfolio, by itself, should not
be considered a balanced investment program.
Under normal circumstances, the Portfolio will invest at least 70% of its
total assets in equity securities of companies principally engaged in the
exploration, mining, fabrication, processing, distribution or trading of gold
(or, to a lesser degree, silver, platinum or other precious metals or minerals)
or the financing, managing, controlling or operating of companies engaged in
such activities. (Such activities and the activities of such related financing,
managing, controlling or operating companies are referred to herein as
"gold-related" or "precious-metals-related" activities.) For these purposes, a
company will be considered to be principally engaged in such activities if it
derives more than 50% of its income, or devotes 50% or more of its assets, to
such activities. With respect to the Portfolio, equity securities include common
and preferred stocks, convertible securities, and rights and warrants to
purchase common stocks. The Portfolio will invest more than 25% of its total
assets in securities of companies in the group of industries involved in
gold-related or precious-metals-related activities, as described above, and may
invest more than 25% of its total assets in one or more of the industries, such
as mining, that are a part of such group of industries, as described above.
Potential investors in the Portfolio should consider the possibly greater risk
arising from the concentration of the Portfolio's investments in one such
industry or the group of industries.
Because most of the world's gold production is outside of the United States,
the Portfolio expects that a significant portion of its assets may be invested
in securities of foreign issuers. The percentage of assets invested in
particular countries or regions will change from time to time in accordance with
the judgment of Morgan Stanley Asset Management, Inc. (the "Adviser") and Sun
Valley Gold Company (the "Sub-Adviser", and collectively with the Adviser, the
"Advisers"), which may be based on, among other things, consideration of the
political stability and economic outlook of these countries or regions. It is
currently anticipated, however, that the Portfolio's assets will be principally
invested in the equity securities of companies located in the United States,
Canada and Australia, and the Portfolio's assets may be invested in equity
securities of companies located in South Africa.
The Portfolio expects to invest in foreign securities by buying the foreign
securities themselves, but the Portfolio may also invest in American Depositary
Receipts ("ADRs"), European Depositary Receipts ("EDRs") or similar securities
that are convertible into securities of foreign issuers and that evidence
ownership of the underlying foreign security when the Advisers believe that it
is in the best interest of the Portfolio to do so. ADRs are dollar-denominated
receipts that are generally issued by domestic banks or trust companies and
which represent the deposit with the bank or trust company of a security of a
foreign issuer. EDRs are European receipts evidencing a similar arrangement with
a European bank. Generally, ADRs, in registered form, are designed for use in
the U.S. securities market and EDRs, in bearer form, are designed for use in the
European securities market. ADRs may be sponsored or unsponsored. The issuers of
the stock of unsponsored ADRs are
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not obligated to disclose material information in the United States and
therefore, there may not be a correlation between such information and the
market value of the ADR. In the event that ADRs or EDRs are not available for a
particular security, the Portfolio may invest in that security, which may or may
not be listed on a foreign securities exchange.
The Portfolio may also invest up to 10% of its total assets in gold bullion.
Bullion will only be bought from and sold to U.S. and foreign banks, regulated
U.S. commodities exchanges, exchanges affiliated with a regulated U.S. stock
exchange, and dealers who are members of, or affiliated with, a regulated U.S.
commodities exchange, in accordance with applicable investment laws. Investors
should note that bullion offers the potential for capital appreciation or
depreciation, but unlike other investments does not generate income. In bullion
transactions, the Portfolio may encounter higher custody costs and other costs
(including shipping and insurance) than those costs that are normally associated
with ownership of securities. The Fund may attempt to minimize the costs
associated with the actual custody of bullion by the use of receipts or
certificates representing ownership interests in bullion. The Advisers currently
intend to use the Portfolio's investments in gold bullion as a short-term
investment for portfolio management purposes.
The Portfolio may also invest up to 30% of its assets in money market
instruments under normal circumstances, although the Portfolio intends to stay
invested in securities satisfying its primary investment objective to the extent
practicable. Money market instruments include obligations of the U.S. Government
and its agencies and instrumentalities, commercial paper including bank
obligations, certificates of deposit (including Eurodollar certificates of
deposit) and repurchase agreements. For temporary investment purposes, the
Portfolio may invest up to all of its assets in such instruments.
For hedging purposes only, the Portfolio may enter into forward foreign
currency exchange transactions, covered call and put options (listed on a U.S.
securities exchange or written in the over-the-counter market), futures
contracts and options on futures. The Portfolio may also enter into repurchase
agreements, purchase securities on a when-issued or delayed delivery basis and
lend its portfolio securities. For more information on these practices, see
"Additional Investment Information" below and "Investment Objectives and
Policies" in the Statement of Additional Information.
Any remaining assets of the Portfolio not invested as described above may be
invested in certain securities or obligations.
ADDITIONAL INVESTMENT INFORMATION
DEPOSITARY RECEIPTS. The Portfolio is permitted to invest indirectly in
securities of foreign companies through sponsored or unsponsored American
Depositary Receipts ("ADRs"), Global Depositary Receipts ("GDRs") and other
types of Depositary Receipts (which, together with ADRs and GDRs, are
hereinafter collectively referred to as "Depositary Receipts"), to the extent
such Depositary Receipts are or become available. Depositary Receipts are not
necessarily denominated in the same currency as the underlying securities. In
addition, the issuers of the securities underlying unsponsored Depositary
Receipts are not obligated to disclose material information in the U.S. and,
therefore, there may be less information available regarding such issuers and
there may not be a correlation between such information and the market value of
the Depositary Receipts. ADRs are Depositary Receipts typically issued by a U.S.
financial institution which evidence ownership interests in a security or pool
or securities issued by a foreign issuer. GDRs and other types of Depositary
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Receipts are typically issued by foreign banks or trust companies, although they
also may be issued by U.S. financial institutions, and evidence ownership
interests in a security or pool of securities issued by either a foreign or a
U.S. corporation. Generally, Depositary Receipts in registered form are designed
for use in the U.S. securities market and Depositary Receipts in bearer form are
designed for use in securities markets outside the U.S. For purposes of the
Portfolio's investment policies, the Portfolio's investments in Depositary
Receipts will be deemed to be investments in the underlying securities.
FOREIGN INVESTMENT. Investment in securities of foreign issuers also
involves somewhat different investment risks than those affecting U.S.
investments. There may be limited publicly available information with respect to
foreign issuers, and foreign issuers are not generally subject to uniform
accounting, auditing and financial standards and requirements comparable to
those applicable to domestic companies. There may also be less government
supervision and regulation of foreign securities exchanges, brokers and listed
companies than in the U.S. Many foreign securities markets have substantially
less volume than U.S. national securities exchanges, and securities of some
foreign issuers are less liquid and more volatile than securities of comparable
domestic issuers. Brokerage commissions and other transaction costs on foreign
securities exchanges are generally higher than in the U.S. Dividends and
interest paid by foreign issuers may be subject to withholding and other foreign
taxes, which may decrease the net return on foreign investments as compared to
dividends and interest paid to the Portfolio by domestic companies. It is not
expected that the Portfolio or its shareholders would be able to claim a credit
for U.S. tax purposes with respect to any such foreign taxes. See "Taxes".
Additional risks include future political and economic developments, the
possibility that a foreign jurisdiction might impose or change withholding taxes
on income payable with respect to foreign securities, possible seizure,
nationalization or expropriation of the foreign issuer or foreign deposits and
the possible adoption of foreign governmental restrictions such as exchange
controls. Current developments in South Africa have raised the threat of
political instability and uncertainty concerning the impact of such instability
on South Africa's economy and businesses. Accordingly, the risk of investing in
securities of issuers in South Africa may be greater than the risk of investing
in more stable foreign countries.
Such investments in securities of foreign issuers are frequently denominated
in foreign currencies and because the Portfolio may temporarily hold uninvested
reserves in bank deposits in foreign currencies, the value of the Portfolio's
assets as measured in U.S. dollars may be affected favorably or unfavorably by
changes in currency rates and exchange control regulations, and the Portfolio
may incur costs in connection with conversions between various currencies.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The Portfolio may enter into
forward foreign currency exchange contracts that provide for the purchase or
sale of an amount of a specified currency at a future date. Purposes for which
such contracts may be used include protecting against a decline in a foreign
currency against the U.S. dollar between the trade date and settlement date when
the Portfolio purchases or sells non-U.S. dollar-denominated securities, locking
in the U.S. dollar value of dividends and interest on securities held by the
Portfolio and generally protecting the U.S. dollar value of securities held by
the Portfolio against exchange rate fluctuation. Such contracts may also be used
as a protective measure against the effects of fluctuating rates of currency
exchange and exchange control regulations. While such forward contracts may
limit losses to the Portfolio as a result of exchange rate fluctuation, they
will also limit any gains that may otherwise have been realized. See "Investment
Objectives and Policies -- Forward Currency Exchange Contracts" in the Statement
of Additional Information.
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GOLD RELATED INVESTMENTS. The Portfolio intends to invest at least 70% of
its total assets in securities of companies engaged in gold-related activities.
As a result of this policy, which is a fundamental policy of the Portfolio, the
Portfolio's investments may be subject to greater risk and market fluctuation
than a fund that invests in securities representing a broader range of
investment alternatives. Historically, stock prices of companies involved in
precious metals-related industries have been volatile. Investment related to
gold and other precious metals and minerals are considered speculative and are
impacted by a variety of world-wide economics, financial and political factors.
Prices of gold and other precious metals may fluctuate sharply over short
periods of time due to changes in inflation or expectations regarding inflation
in various countries, the availability of supplies of precious metals, changes
in industrial and commercial demand, metal sales by governments, central banks
or international agencies, investment speculation, monetary and other economic
policies of various governments and government restrictions on private ownership
of certain precious metals and minerals.
LOANS OF PORTFOLIO SECURITIES. The Portfolio may lend securities to
brokers, dealers, domestic and foreign banks or other financial institutions for
the purpose of increasing its net investment income. These loans must be secured
continuously by cash or equivalent collateral, or by a letter of credit at least
equal to the market value of the securities loaned plus accrued interest or
income. There may be a risk of delay in recovery of the securities or even loss
of rights in the collateral should the borrower of the securities fail
financially. The Portfolio will not enter into securities loan transactions
exceeding, in the aggregate, 33 1/3% of the market value of its total assets.
For more detailed information about securities lending see "Investment
Objectives and Policies" in the Statement of Additional Information.
MONEY MARKET INSTRUMENTS. The Portfolio is permitted to invest in money
market instruments, although the Portfolio intends to stay invested in
securities satisfying its primary investment objective to the extent practical.
The Portfolio may make money market investments pending other investments or
settlement for liquidity, or in adverse market conditions. The money market
investments permitted for the Portfolio include obligations of the United States
Government and its agencies and instrumentalities; obligations of foreign
sovereignties; other debt securities; commercial paper including bank
obligations; certificates of deposit (including Eurodollar certificates of
deposit), and repurchase agreements. For more detailed information about these
money market investments, see "Description of Securities and Ratings" in the
Statement of Additional Information.
NON-PUBLICALY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED
SECURITIES. The Portfolio may invest in securities that are neither listed on a
stock exchange nor traded over-the-counter, including privately placed
securities. As a result of the absence of a public trading market for these
securities, they may be less liquid than publically traded securities. Although
these securities may be resold in privately negotiated transactions, the prices
realized from these sales could be less than those originally paid by the
Portfolio, or less than what may be considered the fair value of such
securities. The Portfolio may not invest more than 15% of its net assets in
illiquid securities, including securities for which there is no readily
available secondary market nor more than 10% of its total assets in securities
that are restricted from sale to the public without registration ("Restricted
Securities") under the Securities Act of 1933, as amended (the "1933 Act").
Nevertheless, subject to the foregoing limit on illiquid securities, the
Portfolio may invest up to 20% of its total assets in Restricted Securities that
can be offered and sold to qualified institutional buyers under Rule 144A under
that Act ("144A Securities"). The Board of Directors has adopted guidelines and
delegated to the Advisers, subject to the
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supervision of the Board of Directors, the daily function of determining and
monitoring the liquidity of Rule 144A securities. Rule 144A securities may
become illiquid if qualified institutional buyers are not interested in
acquiring the securities.
PRECIOUS METALS FORWARD AND FUTURES CONTRACTS. The Portfolio may enter into
futures contracts on precious metals as a hedge against changes in the prices of
precious metals held or intended to be acquired by the Portfolio, but not for
speculation or for achieving leverage. The Portfolio's hedging activities may
include purchases of futures contracts as an offset against the effect of
anticipated increases in the price of a precious metal which the Portfolio
intends to acquire or sales of futures contracts as an offset against the effect
of anticipated declines in the price of precious metal which the Portfolio owns.
The Portfolio may enter into precious metals forward contracts, which are
similar to precious metals futures contracts in that they both provide for the
purchase or sale of precious metals at an agreed price with delivery to take
place at an agreed future time. However, unlike futures contracts, forward
contracts are negotiated contracts which are primarily used in the dealer
market. The Portfolio will use forward contracts for the same hedging purposes
as those applicable to futures contracts, as described above. Precious metals
futures and forward contract prices can be volatile and are influenced
principally by changes in spot market prices, which in turn are affected by a
variety of political and economic factors. While the correlation between changes
in prices of futures and forward contracts and prices of the precious metals
being hedged by such contracts has historically been very strong, the
correlation may be imperfect at times, and even a well conceived hedge may be
unsuccessful to some degree because of market behavior or unexpected precious
metals price trends. For more detailed information about precious metals forward
and futures transactions see "Investment Objectives and Policies" in the
Statement of Additional Information.
The Portfolio may also purchase and write covered call or put options on
precious metals futures contracts. Such options would be purchased solely for
hedging purposes. Call options might be purchased to hedge against an increase
in the price of precious metals the Portfolio intends to acquire, and put
options may be purchased to hedge against a decline in the price of precious
metals owned by the Portfolio. As is the case with futures contracts, options on
precious metals futures may facilitate the Portfolio's acquisition of precious
metals or permit the Portfolio to defer disposition of precious metals for tax
or other purposes.
REPURCHASE AGREEMENTS. The Portfolio may enter into repurchase agreements
with brokers, dealers or banks that meet the credit guidelines of the Fund's
Directors. In a repurchase agreement, the Portfolio buys a security from a
seller that has agreed to repurchase it at a mutually agreed upon date and
price, reflecting the interest rate effective for the term of the agreement. The
term of these agreements is usually from overnight to one week and never exceeds
one year. Repurchase agreements may be viewed as a fully collateralized loan of
money by the Portfolio to the seller. The Portfolio always receives securities
with a market value at least equal to the purchase price (including accrued
interest) as collateral, and this value is maintained during the term of the
agreement. If the seller defaults and the collateral value declines, the
Portfolio might incur a loss. If bankruptcy proceedings are commenced with
respect to the seller, the Portfolio's realization upon the collateral may be
delayed or limited. The aggregate of certain repurchase agreements and certain
other investments is limited as set forth under "Investment Limitations."
STOCK OPTIONS, STOCK FUTURES CONTRACTS AND OPTIONS ON STOCK FUTURES
CONTRACTS. The Portfolio may write (i.e., sell) covered call options and
covered put options on portfolio securities. By selling a covered call option,
the Portfolio would become obligated during the terms of the option to deliver
the securities underlying
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the option should the option holder choose to exercise the option before the
option's termination date. In return for the call it has written, the Portfolio
will receive from the purchaser (or option holder) a premium which is the price
of the option, less a commission charged by a broker. The Portfolio will keep
the premium regardless of whether the option is exercised. By selling a covered
put option, the Portfolio incurs an obligation to buy the security underlying
the option from the purchaser of the put at the option's exercise price at any
time during the option period, at the purchaser's election (certain options
written by the Portfolio will be exercisable by the purchaser only on a specific
date). A call option is "covered" if the Portfolio owns the security underlying
the option it has written or has an absolute or immediate right to acquire the
security by holding a call option on such security, or maintains a sufficient
amount of cash, cash equivalents or liquid securities to purchase the underlying
security. Generally, a put option is "covered" if the Portfolio maintains cash,
U.S. Government securities or other high grade debt obligations equal to the
exercise price of the option or if the Portfolio holds a put option on the same
underlying security with a similar or higher exercise price.
When the Portfolio writes covered call options, it augments its income by
the premiums received, and is thereby hedged, to the extent of that amount,
against a decline in the price of the underlying securities. The premiums
received will offset a portion of the potential loss incurred by the Portfolio
if the securities underlying the options are ultimately sold by the Portfolio at
a loss. However, during the option period, the Portfolio has, in return for the
premium on the option, given up the opportunity for capital appreciation above
the exercise price should the market price of the underlying security increase,
but has retained the risk of loss should the price of the underlying security
decline.
The Portfolio will write put options to receive the premiums paid by
purchasers (when the Advisers wish to purchase the security underlying the
option at a price lower than its current market price, in which case the
Portfolio will write the covered put at an exercise price reflecting the lower
purchase price sought) and to close out a long put option position.
The Portfolio may also purchase put or call options on its portfolio
securities. When the Portfolio purchases a call option it acquires the right to
buy a designated security at a designated price (the "exercise price"), and when
the Portfolio purchases a put option it acquires the right to sell a designated
security at the exercise price, in each case on or before a specified date (the
"termination date"), usually not more than nine months from the date the option
is issued. The Portfolio may purchase call options to close out a covered call
position or to protect against an increase in the price of a security it
anticipates purchasing. The Portfolio may purchase put options on securities
which it holds in its portfolio only to protect itself from a decline in the
value of the security. If the value of the underlying security were to fall
below the exercise price of the put purchased in an amount greater than the
premium paid for the option, the Portfolio would incur no additional loss. The
Portfolio may also purchase put options to close out written put positions in a
manner similar to call option closing purchase transactions. There are no other
limits on the Portfolio's ability to purchase call and put options.
The Portfolio may enter into futures contracts and options on futures
contracts as a hedge against fluctuations in price of a security it holds or
intends to acquire, but not for speculation or for achieving leverage. The
Portfolio may also enter into futures transactions to remain fully invested and
to reduce transaction costs. The Portfolio may enter into futures contracts and
options on futures contracts provided that not more than 5% of the Portfolio's
total assets at the time of entering into the contract or option is required as
deposit to secure obligations under such contracts and options, and provided
that not more than 20% of the Portfolio's total assets in the aggregate is
invested in options, futures contracts and options on futures contracts.
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The Portfolio may purchase and write call and put options on futures
contracts that are traded on a U.S. exchange, and enter into closing
transactions with respect to such options to terminate an existing position. An
option on a futures contract gives the purchaser the right (in return for the
premium paid) to assume a position in future contract (a long position if the
option is a call and a short position if the option is a put) at a specified
exercise price at any time during the term of the option. The Portfolio will
purchase and write options on futures contracts for the purchase of a futures
contract (purchase of a call option or sale of a put option) and for the sale of
a futures contract (purchase of a put option or sale of a call option), or to
close out a long or short position in future contracts for identical purposes to
those set forth above.
The primary risks associated with the use of option, futures and options on
futures are (i) imperfect correlation between the change in market value of the
stocks held by the Portfolio, and the prices of futures and options relating to
the stocks purchased or sold by the Portfolio; and (ii) possible lack of a
liquid secondary market for a futures contract and the resulting inability to
close a futures position which could have an adverse impact on the Portfolio's
ability to hedge. In the opinion of the Board of Directors, the risk that the
Portfolio will be unable to close out a futures position or options contract
will be minimized by only entering into futures contracts or options
transactions for which there appears to be a liquid secondary market.
TEMPORARY INVESTMENTS. During periods in which the Adviser believes changes
in economic, financial or political conditions make it advisable, the Portfolio
may reduce its holdings in equity and other securities, for temporary defensive
purposes, and the Portfolio may invest in certain short-term (less than twelve
months to maturity) and medium-term (not greater than five years to maturity)
debt securities or may hold cash. The short-term and medium-term debt securities
in which the Portfolio may invest consist of (a) obligations of the United
States or foreign country governments, their respective agencies or
instrumentalities; (b) bank deposits and bank obligations (including
certificates of deposit, time deposits and bankers' acceptances) of United
States or foreign country banks denominated in any currency; (c) floating rate
securities and other instruments denominated in any currency issued by
international development agencies; (d) finance company and corporate commercial
paper and other short-term corporate debt obligations of United States and
foreign country corporations meeting the Portfolio's credit quality standards;
and (e) repurchase agreements with banks and broker-dealers with respect to such
securities. For temporary defensive purposes, the Portfolios intend to invest
only in short-term and medium-term debt securities that the Adviser believes to
be of high quality, i.e., subject to relatively low risk of loss of interest or
principal. There is currently no rating system for debt securities in most
foreign countries.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Portfolio may purchase
securities on a when-issued or delayed delivery basis. In such transactions,
instruments are bought with payment and delivery taking place in the future in
order to secure what is considered to be an advantageous yield or price at the
time of the transaction. Delivery of and payment for these securities may take
as long as a month or more after the date of the purchase commitment but will
take place no more than 120 days after the trade date. The Portfolio will
maintain with the Custodian a separate account with a segregated portfolio of
high-grade equity securities or cash in an amount at least equal to these
commitments. The payment obligation and the interest rates that will be received
are each fixed at the time the Portfolio enters into the commitment and no
interest accrues to the Portfolio until settlement. Thus, it is possible that
the market value at the time of settlement could be higher or lower than the
purchase price if, among other factors, the general level of interest rates has
changed. It is a
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current policy of the Portfolio not to enter into when-issued commitments
exceeding in the aggregate 15% of the market value of the Portfolio's total
assets less liabilities, other than the obligations created by these
commitments.
INVESTMENT LIMITATIONS
As a diversified investment company, the Gold Portfolio is subject to the
following limitations: (a) as to 75% of its total assets, the Portfolio may not
invest more than 5% of its total assets in the securities of any one issuer,
except obligations of the U.S. Government and its agencies and
instrumentalities, and (b) the Portfolio may not own more than 10% of the
outstanding voting securities of any one issuer.
The Portfolio also operates under certain investment restrictions that are
deemed fundamental limitations and may be changed only with the approval of the
holders of a majority of the Portfolio's outstanding shares. See "Investment
Limitations" in the Statement of Additional Information. In addition, the
Portfolio operates under certain non-fundamental investment limitations as
described below and in the Statement of Additional Information. The Portfolio
may not (i) enter into repurchase agreements with more than seven days to
maturity if, as a result, more than 15% of the market value of the Portfolio's
net assets would be invested in such repurchase agreements and other investments
for which market quotations are not readily available or which are otherwise
illiquid; (ii) borrow money, except from banks for extraordinary or emergency
purposes, and then only in amounts up to 10% of the value of the Portfolio's
total assets, taken at cost at the time of borrowing, or purchase securities
while borrowings exceed 5% of its total assets; (iii) mortgage, pledge or
hypothecate any assets except in connection with any such borrowing in amounts
up to 10% of the value of the Portfolio's net assets at the time of borrowing;
(iv) invest in fixed time deposits with a duration of over seven calendar days;
or (v) invest in fixed time deposits with a duration of from two business days
to seven calendar days if more than 10% of the Portfolio's total assets would be
invested in these deposits.
MANAGEMENT OF THE FUND
INVESTMENT ADVISER AND SUB-ADVISER. Morgan Stanley Asset Management Inc. is
the Investment Adviser and Administrator of the Fund and each of its portfolios.
The Adviser provides investment advice and portfolio management services,
pursuant to an Investment Advisory Agreement and, subject to the supervision of
the Fund's Board of Directors, makes each of the Portfolio's day-to-day
investment decisions, arranges for the execution of portfolio transactions and
generally manages each of the Portfolio's investments. With respect to the
Portfolio, the Adviser has delegated these responsibilities, subject to its
supervision, to the Sub-Adviser. The Adviser is entitled to receive from the
Portfolio an annual investment advisory fee, payable quarterly, in an amount
equal to 1.00% of the average daily net assets of the Portfolio.
Sun Valley Gold Company is sub-adviser of the Portfolio. Pursuant to a
Sub-Advisory Agreement, and subject at all times to the supervision of the
Adviser and the Board of Directors of the Fund, the Sub-Adviser provides
investment advice and portfolio management services, makes the Portfolio's
day-to-day investment decisions, arranges for the execution of portfolio
transactions and generally manages the Portfolio's investments. The Sub-Adviser
is entitled to receive from the Adviser an annual sub-advisory fee, payable
quarterly, in an amount equal to 0.40% of the average daily net assets of the
Portfolio.
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The Adviser has agreed to a reduction in the fees payable to it and to
reimburse the Portfolio, if necessary, if such fees would cause the total annual
operating expenses for Class A and Class B shares to exceed 1.25% and 1.50%,
respectively, of its average daily net assets. The Sub-Adviser has agreed to a
proportionate reduction in its fees from the Adviser if the Adviser is required
to waive its fees or to reimburse the Portfolio so that the Portfolio's total
operating expenses for Class A and Class B shares do not exceed 1.25% and 1.50%,
respectively, of its average daily net assets.
The Adviser, with principal offices at 1221 Avenue of the Americas, New
York, New York 10020, conducts a worldwide portfolio management business. It
provides a broad range of portfolio management services to customers in the
United States and abroad. At December 31, 1995, the Adviser, together with its
affiliated asset management companies, managed investments totaling
approximately $57.4 billion, including approximately $41.9 billion under active
management and $15.5 billion as Named Fiduciary or Fiduciary Adviser. See
"Management of the Fund" in the Statement of Additional Information.
The Sub-Adviser, with principal offices at 620 Sun Valley Road, Sun Valley,
Idaho 83340, specializes in the management of gold-related investments. At March
31, 1996, the Sub-Adviser managed investments totaling approximately $192
million.
PORTFOLIO MANAGER. Peter F. Palmedo, the President of the Sub-Adviser since
its inception in January, 1992, has had primary portfolio management
responsibility for the Portfolio since its inception. He has also served as
President of Sun Valley Gold Trading, Inc., a registered broker-dealer, since
its inception in January, 1992, and of Mad River Management since September,
1989. Prior thereto, Mr. Palmedo worked at Morgan Stanley in the institutional
equity department and specialized in portfolio risk management, derivatives and
the development and analysis of long-dated options, synthetic options and
options embedded in securities. He received a BA in Business and Finance from
Hampshire College in 1979.
ADMINISTRATOR. The Adviser also provides the Fund with administrative
services pursuant to an Administration Agreement. The services provided under
the Administration Agreement are subject to the supervision of the Officers and
the Board of Directors of the Fund and include day-to-day administration of
matters related to the corporate existence of the Fund, maintenance of its
records, preparation of report, supervision of the Fund's arrangements with its
custodian, and assistance in the preparation of the Fund's registration
statements under federal and state laws. The Administration Agreement also
provides that the Administrator, through its agents, will provide the Fund
dividend disbursing and transfer agent services. For its services under the
Administration Agreement, the Fund pays the Adviser a monthly fee which on an
annual basis equals 0.15% of the average daily net assets of the Portfolio.
Under an agreement between the Adviser and The Chase Manhattan Bank, N.A.
("Chase"), Chase provides certain administrative services to the Fund. In a
merger completed on September 1, 1995, Chase succeeded to all of the rights and
obligations under the U.S. Trust Administration Agreement between the Adviser
and the United States Trust Company of New York ("U.S. Trust"), pursuant to
which U.S. Trust had agreed to provide certain administrative services to the
Fund. Pursuant to a delegation clause in the U.S. Trust Administration
Agreement, U.S. Trust delegated its administration responsibilities to Chase
Global Funds Services Company ("CGFSC"), formerly known as Mutual Funds Service
Company which after the merger with Chase is a subsidiary of Chase and will
continue to provide certain administrative services to the Fund. The Adviser
supervises and monitors such administrative services provided by CGFSC. The
services provided under the
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Administration Agreement and the U.S. Trust Administration Agreement are also
subject to the supervision of the Board of Directors of the Fund. The Board of
Directors of the Fund has approved the provision of services described above
pursuant to the Administration Agreement and the U.S. Trust Administration
Agreement as being in the best interest of the Fund. CGFSC's business address is
73 Tremont Street, Boston, Massachusetts 02108-3913. For additional information
regarding the Administration Agreement or the U.S. Trust Administration
Agreement, see "Management of the Fund" in the Statement of Additional
Information.
DIRECTORS AND OFFICERS. Pursuant to the Fund's Articles of Incorporation,
the Board of Directors decides upon matters of general policy and reviews the
actions of the Fund's Adviser, Administrator and Distributor. The Officers of
the Fund conduct and supervise its daily business operations.
DISTRIBUTOR. Morgan Stanley serves as the exclusive Distributor of the
shares of the Fund. Under its Distribution Agreement with the Fund, Morgan
Stanley sells shares of the Portfolio upon the terms and at the current offering
price described in this Prospectus. Morgan Stanley is not obligated to sell any
certain number of shares of the Portfolio.
The Portfolio currently offers only the classes of shares offered by this
Prospectus. The Portfolio may in the future offer one or more classes of shares
with features, distribution expenses or other expenses that are different from
those of the classes currently offered.
The Fund has adopted a Plan of Distribution with respect to the Class B
shares pursuant to Rule 12b-1 under the 1940 Act (the "Plan"). Under the Plan,
the Distributor is entitled to receive from the Portfolio a distribution fee,
which is accrued daily and paid quarterly, of 0.25% of the Class B shares'
average daily net assets on an annualized basis. The Distributor expects to
reallocate most of its fee to its investment representatives. The Distributor
may, in its discretion, voluntarily waive from time to time all or any portion
of its distribution fee and each of the Distributor and the Adviser is free to
make additional payments out of its own assets to promote the sale of Fund
shares, including payments that compensate financial institutions for
distribution services or shareholder services.
The plan is designed to compensate the Distributor for its services, not to
reimburse the Distributor for its expenses, and the Distributor may retain any
portion of the fee that it does not expend in fulfillment of its obligations to
the Fund.
EXPENSES. The Portfolio is responsible for payment of certain other fees
and expenses (including legal fees, accountants' fees, custodial fees, and
printing and mailing costs) specified in the Administration and Distribution
Agreements.
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PURCHASE OF SHARES
Class A and Class B shares of the Portfolio may be purchased, without sales
commission, at the net asset value per share next determined after receipt of
the purchase order by the Portfolio. See "Valuation of Shares."
MINIMUM INVESTMENT AND ACCOUNT SIZES; CONVERSION FROM CLASS A TO CLASS B SHARES
For a Portfolio account opened on or after January 2, 1996 (a "New
Account"), the minimum initial investment and minimum account size are $500,000
for Class A shares and $100,000 for Class B shares. Managed Accounts may
purchase Class A shares without being subject to any minimum initial investment
or minimum account size requirements for a Portfolio account. Officers of the
Adviser and its affiliates are subject to the minimums for a Portfolio account,
except they may purchase Class B shares subject to a minimum initial investment
and minimum account size of $5,000 for a Portfolio account.
If the value of a New Account containing Class A shares falls below $500,000
(but remains at or above $100,000) because of shareholder redemption(s), the
Fund will notify the shareholder, and if the account value remains below
$500,000 (but remains at or above $100,000) for a continuous 60-day period, the
Class A shares in such account will convert to Class B shares and will be
subject to the distribution fee and other features applicable to the Class B
shares. The Fund, however, will not convert Class A shares to Class B shares
based solely upon changes in the market that reduce the net asset value of
shares. Under current tax law, conversions between share classes are not a
taxable event to the shareholder.
Shares in a Portfolio account opened prior to January 2, 1996 (a "Pre-1996
Account") were designated Class A shares on January 2, 1996. Shares in a
Pre-1996 Account with a value of $100,000 or more on March 1, 1996 (a
"Grandfathered Class A Account") remained Class A shares regardless of account
size thereafter. Except for shares in a Managed Account, shares in a Pre-1996
Account with a value of less than $100,000 on March 1, 1996 (a "Grandfathered
Class B Account") converted to Class B shares on March 1, 1996. Grandfathered
Class A Accounts and Managed Accounts are not subject to conversion from Class A
shares to Class B shares.
Investors may also invest in the Fund by purchasing shares through a trust
department, broker, dealer, agent, financial planner, financial services firm or
investment adviser. An investor may be charged an additional service or
transaction fee by that institution. The minimum investment levels may be waived
at the discretion of the Adviser for (i) certain employees and customers of
Morgan Stanley or its affiliates and certain trust departments, brokers,
dealers, agents, financial planners, financial services firms, or investment
advisers that have entered into an agreement with Morgan Stanley or its
affiliates; and (ii) retirement and deferred compensation plans and trusts used
to fund such plans, including, but not limited to, those defined in Section
401(a), 403(b) or 457 of the Internal Revenue Code of 1986, as amended, and
"rabbi trusts". The Fund reserves the right to modify or terminate the
conversion features of the shares as stated above at any time upon 60-days'
notice to shareholders.
MINIMUM ACCOUNT SIZES AND INVOLUNTARY REDEMPTION OF SHARES
If the value of a New Account falls below $100,000 because of shareholder
redemption(s), the Fund will notify the shareholder, and if the account value
remains below $100,000 for a continuous 60-day period, the shares in such
account are subject to redemption by the Fund and, if redeemed, the net asset
value of such shares will be promptly paid to the shareholder. The Fund,
however, will not redeem shares based solely upon changes in the market that
reduce the net asset value of shares.
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For purposes of redemptions by the Fund, the foregoing minimum account size
requirements do not apply to New Accounts containing Class B shares held by
officers of the Adviser or its affiliates. However, if the value of such account
held by an officer of the Adviser or its affiliates falls below $5,000 because
of shareholder redemption(s), the Fund will notify the shareholder, and if the
account value remains $5,000 for a continuous 60-day period, the shares in such
account are subject to redemption by the Fund and, if redeemed, the net asset
value of such shares will be promptly paid to the shareholder.
Grandfathered Class A Accounts, Grandfathered Class B Accounts and Managed
Accounts are not subject to involuntary redemption.
The Fund reserves the right to modify or terminate the involuntary
redemption features of the shares as stated above at any time upon 60-days'
notice to shareholders.
CONVERSION FROM CLASS B TO CLASS A SHARES
If the value of Class B shares in a Portfolio account increases, whether due
to shareholder share purchases or market activity, to $500,000 or more, the
Class B shares will convert to Class A shares. Under current tax law, such
conversion is not a taxable event to the shareholder. Class A shares converted
from Class B shares are subject to the same minimum account size requirements
that are applicable to New Accounts containing Class A shares, as stated above.
The Fund reserves the right to modify or terminate this conversion feature at
any time upon 60-days' notice to shareholders.
INITIAL PURCHASES DIRECTLY FROM THE FUND
The Fund's determination of an investor's eligibility to purchase shares of
a given class will take precedence over the investor's selection of a class.
Assuming the investor is eligible for the class, the Fund will select the most
favorable class for the investor, if the investor has not done so.
1) BY CHECK. An account may be opened by completing and signing an Account
Registration Form, and mailing it, together with a check ($500,000 minimum
for Class A shares of the Portfolio and $100,000 for Class B shares of the
Portfolio, with certain exceptions for Morgan Stanley employees and select
customers) payable to "Morgan Stanley Institutional Fund, Inc. -- Gold
Portfolio", to:
Morgan Stanley Institutional Fund, Inc.
P.O. Box 2798
Boston, Massachusetts 02208-2798
Payment will be accepted only in U.S. dollars, unless prior approval for payment
by other currencies is given by the Fund. The class(es) of shares of the
Portfolio to be purchased should be designated on the Account Registration Form.
For purchases by check, the Fund is ordinarily credited with Federal Funds
within one business day. Thus, your purchase of shares by check is ordinarily
credited to your account at the net asset value per share of the Portfolio
determined on the next business day after receipt.
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2) BY FEDERAL FUNDS WIRE. Purchases may be made by having your bank wire
Federal Funds to the Fund's bank account. In order to ensure prompt receipt
of your Federal Funds Wire, it is important that you follow these steps:
A. Telephone the Fund (toll free: 1-800-548-7786) and provide us with your
name, address, telephone number, Social Security or Tax Identification
Number, the Portfolio(s) selected, the class selected, the amount being
wired, and by which bank. We will then provide you with a Fund account
number. (Investors with existing accounts should also notify the Fund prior
to wiring funds.)
B. Instruct your bank to wire the specified amount to the Fund's Wire
Concentration Bank Account (be sure to have your bank include the name of
the portfolio(s) selected, the class selected and the account number
assigned to you) as follows:
Chase Manhattan Bank, N.A.
One Manhattan Plaza
New York, NY 10081-1000
ABA #021000021
DDA #910-2-733293
Attn: Morgan Stanley Institutional Fund, Inc.
Ref: (Portfolio name, your account number, your account name)
Please call the Fund at 1-800-548-7786 prior to wiring funds.
C. Complete and sign the Account Registration Form and mail it to the address
shown thereon.
Purchase orders for shares of the Portfolio which are received prior to the
regular close of the NYSE (currently 4:00 p.m. Eastern Time) will be executed at
the price computed on the date of receipt as long as the Transfer Agent receives
payment by check or in Federal Funds prior to the regular close of the NYSE on
such day.
Federal Funds purchase orders will be accepted only on a day on which the Fund
and Chase (the "Custodian Bank") are open for business. Your bank may charge a
service fee for wiring funds.
3) BY BANK WIRE. The same procedure outlined under "By Federal Funds Wire"
above must be followed in purchasing shares by bank wire. However, money
transferred by bank wire may or may not be converted into Federal Funds the
same day, depending on the time the money is received and the bank handling
the wire. Prior to such conversion, an investor's money will not be invested.
Your bank may charge a service fee for wiring funds.
ADDITIONAL INVESTMENTS
You may add to your account at any time (minimum additional investment
$1,000, except for automatic reinvestment of dividends and capital gains
distributions for which there are no minimums) by purchasing shares at net asset
value by mailing a check to the Fund (payable to "Morgan Stanley Institutional
Fund, Inc. -- Gold Portfolio") at the above address or by wiring monies to the
Custodian Bank as outlined above. It is very important that your account name,
the portfolio name and the class selected be specified in the letter or wire to
ensure proper crediting to your account. In order to ensure that your wire
orders are invested promptly, you are
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requested to notify one of the Fund's representatives (toll free:
1-800-548-7786) prior to the wire date. Additional investments will be applied
to purchase additional shares in the same class held by a shareholder in a
Portfolio account.
OTHER PURCHASE INFORMATION
The purchase price of the Class A and Class B shares of the Portfolio is the
net asset value next determined after the order is received. See "Valuation of
Shares." An order received prior to the regular close of the New York Stock
Exchange ("NYSE"), which is currently 4:00 p.m. (Eastern Time), will be executed
at the price computed on the date of receipt; an order received after the
regular close of the NYSE will be executed at the price computed on the next day
the NYSE is open as long as the Transfer Agent receives payment by check or in
Federal Funds prior to the regular close of the NYSE on such day.
Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends. The net asset value of Class B shares will generally be
lower than the net asset value of Class A shares as a result of the distribution
expense charged to Class B shares. It is expected, however, that the net asset
value per share of the two classes will tend to converge immediately after the
recording of dividends which will differ by approximately the amount of the
distribution expense accrual differential between the classes.
In the interest of economy and convenience, and because of the operating
procedures of the Fund, certificates representing shares of the Portfolio will
not be issued. All shares purchased are confirmed to you and credited to your
account on the Fund's books maintained by the Adviser or its agents. You will
have the same rights and ownership with respect to such shares as if
certificates had been issued.
To ensure that checks are collected by the Fund, withdrawals of investments
made by check are not presently permitted until payment for the purchase has
been received, which may take up to eight business days after the date of
purchase. As a condition of this offering, if a purchase is canceled due to
nonpayment or because your check does not clear, you will be responsible for any
loss the Fund or its agents incur. If you are already a shareholder, the Fund
may redeem shares from your account(s) to reimburse the Fund or its agents for
any loss. In addition, you may be prohibited or restricted from making future
investments in the Fund.
Investors may also invest in the Fund by purchasing shares through the
Distributor. See "Purchase of Shares" in the Statement of Additional
Information.
EXCESSIVE TRADING
Frequent trades involving either substantial portfolio assets or a
substantial portion of your account or accounts controlled by you can disrupt
management of a portfolio and raise its expenses. Consequently, in the interest
of all the stockholders of the Portfolio and the Portfolio's performance, the
Fund may in its discretion bar a stockholder that engages in excessive trading
of shares of any class of a portfolio from further purchases of shares of the
Fund for an indefinite period. The Fund considers excessive trading to be more
than one purchase and sale involving shares of the same class of a portfolio of
the Fund within any 120-day period. As an example, exchanging shares of
portfolios of the Fund as follows amounts to excessive trading: exchanging Class
A shares of Portfolio A for Class A shares of Portfolio B, then exchanging Class
A shares of Portfolio B for Class A shares of Portfolio C and again exchanging
Class A shares of Portfolio C for Class A shares of Portfolio B within a 120-day
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period. Two types of transactions are exempt from these excessive trading
restrictions; (1) trades exclusively between money market portfolios; and (2)
trades done in connection with an asset allocation service, such as TFM
Accounts, managed or advised by MSAM and/or any of its affiliates.
REDEMPTION OF SHARES
You may withdraw all or any portion of the amount in your account by
redeeming shares at any time. Please note that purchases made by check are not
permitted to be redeemed until payment of the purchase price has been collected,
which may take up to eight business days after purchase. The Fund will redeem
Class A shares or Class B shares of the Portfolio at the next determined net
asset value of shares of the applicable class. On days that both the NYSE and
the Custodian Bank are open for business, the net asset value per share of the
Portfolio is determined at the regular close of trading of the NYSE (currently
4:00 p.m. Eastern Time). Shares of the Portfolio may be redeemed by mail or
telephone. No charge is made for redemption. Any redemption proceeds may be more
or less than the purchase price of your shares depending on, among other
factors, the market value of the investment securities held by the Portfolio.
BY MAIL
The Portfolio will redeem its Class A shares or Class B shares at the net
asset value determined on the date the request is received, if the request is
received in "good order" before the regular close of the NYSE. Your request
should be addressed to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798,
Boston, Massachusetts 02208-2798, except that deliveries by overnight courier
should be addressed to Morgan Stanley Institutional Fund, Inc., c/o Chase Global
Funds Services Company, 73 Tremont Street, Boston, Massachusetts 02108-3913.
"Good order" means that the request to redeem shares must include the
following documentation:
(a) A letter of instruction or a stock assignment specifying the class
and number of shares or dollar amount to be redeemed, signed by all
registered owners of the shares in the exact names in which they are
registered;
(b) Any required signature guarantees (see "Further Redemption
Information" below); and
(c) Other supporting legal documents, if required, in the case of
estates, trusts, guardianships, custodianships, corporations, pension and
profit-sharing plans and other organizations.
Shareholders who are uncertain of requirements for redemption should consult
with a Morgan Stanley Institutional Fund representative.
BY TELEPHONE
Provided you have previously elected the Telephone Redemption Option on the
Account Registration Form, you can request a redemption of your shares by
calling the Fund and requesting the redemption proceeds be mailed to you or
wired to your bank. Please contact one of Morgan Stanley Institutional Fund's
representatives for further details. In times of drastic market conditions, the
telephone redemption option may be difficult to implement. If you experience
difficulty in making a telephone redemption, your request may be made by mail or
overnight courier and will be implemented at the net asset value next determined
after it is received. Redemption requests sent to the Fund through overnight
courier must be sent to Morgan Stanley Institutional Fund, Inc., c/o Chase
Global Funds Services Company, 73 Tremont Street, Boston, Massachusetts
02108-3913.
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The Fund and the Fund's transfer agent (the "Transfer Agent") will employ
reasonable procedures to confirm that the instructions communicated by telephone
are genuine. These procedures include requiring the investor to provide certain
personal identification information at the time an account is opened and prior
to effecting each transaction requested by telephone. In addition, all telephone
transaction requests will be recorded and investors may be required to provide
additional telecopied written instructions regarding transaction requests.
Neither the Fund nor the Transfer Agent will be responsible for any loss,
liability, cost or expense for following instructions received by telephone that
either of them reasonably believes to be genuine.
To change the commercial bank or account designated to receive redemption
proceeds, a written request must be sent to the Fund at the address above.
Requests to change the bank or account must be signed by each shareholder and
each signature must be guaranteed.
FURTHER REDEMPTION INFORMATION
Normally the Fund will make payment for all shares redeemed within one
business day of receipt of the request, but in no event will payment be made
more than seven days after receipt of a redemption request in good order.
However, payments to investors redeeming shares which were purchased by check
will not be made until payment for the purchase has been collected, which may
take up to eight days after the date of purchase. The Fund may suspend the right
of redemption or postpone the date upon which redemptions are effected at times
when the NYSE is closed, or under any emergency circumstances as determined by
the Securities and Exchange Commission (the "Commission").
If the Board of Directors determines that it would be detrimental to the
best interests of the remaining shareholders of the Portfolio to make payment
wholly or partly in cash, the Fund may pay the redemption proceeds in whole or
in part by a distribution in-kind of securities held by the Portfolio in lieu of
cash in conformity with applicable rules of the Commission.
Distributions-in-kind will be made in readily marketable securities. Investors
may incur brokerage charges on the sale of portfolio securities so received in
payment of redemptions.
To protect your account, the Fund and its agents from fraud, signature
guarantees are required for certain redemptions to verify the identity of the
person who has authorized a redemption from your account. Please contact the
Fund for further information. See "Redemption of Shares" in the Statement of
Additional Information.
SHAREHOLDER SERVICES
EXCHANGE FEATURES
You may exchange shares that you own in the Portfolio for shares of any
other available portfolio of the Fund (other than the International Equity
Portfolio, which is closed to new investors). In exchanging for shares of a
portfolio with more than one class, the class of shares you receive in the
exchange will be determined in the same manner as any other purchase of shares
and will not be based on the class of shares surrendered for the exchange.
Consequently, the same minimum initial investment and minimum account size for
determining the class of shares received in the exchange will apply. See
"Purchase of Shares." Shares of the portfolios may be exchanged by mail or
telephone. The privilege to exchange shares by telephone is automatic and made
available without shareholder election. Before you make an exchange, you should
read the prospectus of the portfolio(s) in which you seek to invest. Because an
exchange transaction is treated as a redemption followed by a purchase, an
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exchange would be considered a taxable event for shareholders subject to tax.
The exchange privilege is only available with respect to portfolios that are
registered for sale in a shareholder's state of residence. The exchange
privilege may be modified or terminated by the Fund at any time upon 60-days'
notice to shareholders.
BY MAIL
In order to exchange shares by mail, you should include in the exchange
request the name, class of shares and account number of your current Portfolio,
the names of the portfolio(s) and class(es) of shares into which you intend to
exchange shares, and the signatures of all registered account holders. Send the
exchange request to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798,
Boston, Massachusetts 02208-2798.
BY TELEPHONE
When exchanging shares by telephone, have ready the name, class of shares
and account number of the current portfolios, the name(s) of the portfolio(s)
and class(es) of shares into which you intend to exchange shares, your Social
Security number or Tax I.D. number, and your account address. Requests for
telephone exchanges received prior to 4:00 p.m. (Eastern Time) are processed at
the close of business that same day based on the net asset value of the class of
the portfolio involved in the exchange of shares at the close of business.
Requests received after 4:00 p.m. (Eastern Time) are processed the next business
day based on the net asset value determined at the close of business on such
day. For additional information regarding responsibility for the authenticity of
telephoned instructions, see "Redemption of Shares By Telephone" above.
TRANSFER OF REGISTRATION
You may transfer the registration of any of your Fund shares to another
person by writing to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798,
Boston, Massachusetts 02208-2798. As in the case of redemptions, the written
request must be received in good order before any transfer can be made.
Transferring the registration of shares may affect the eligibility of your
account for a given class of the Portfolio's shares and may result in
involuntary conversion or redemption of your shares. See "Purchase of Shares"
above.
VALUATION OF SHARES
The net asset value per share of a class of shares of the Portfolio is
determined by dividing the total market value of the Portfolio's investments and
other assets attributable to such class, less any liabilities attributable to
such class, by the total number of outstanding shares of such class of the
Portfolio. Net asset value is calculated separately for each class of the
Portfolio. Net asset value per share is determined as of the regular close of
the NYSE on each day that the NYSE is open for business. Price information on
listed securities is taken from the exchange where the security is primarily
traded. Securities listed on a U.S. securities exchange for which market
quotations are available are valued at the last quoted sale price on the day the
valuation is made. Securities listed on a foreign exchange are valued at their
closing price. Unlisted securities and listed securities not traded on the
valuation date for which market quotations are not readily available are valued
at a price within a range not exceeding the current asked price nor less than
the current bid price. The current bid and asked prices are determined based on
the bid and asked prices quoted on such valuation date by reputable brokers.
Bonds and other fixed income securities are valued according to the broadest
and most representative market, which will ordinarily be the over-the-counter
market. Net asset value includes interest on fixed income securities, which is
accrued daily. In addition, bonds and other fixed income securities may be
valued on the basis of prices provided by a pricing service when such prices are
believed to reflect the fair market value of such
26
<PAGE>
securities. The prices provided by a pricing service are determined without
regard to bid or last sale prices but take into account institutional size
trading in similar groups of securities and any developments related to the
specific securities. Securities not priced in this manner are valued at the most
recently quoted bid price or, when securities exchange valuations are used, at
the latest quoted sale price on the day of valuation. If there is no such
reported sale, the latest quoted bid price will be used. Securities purchased
with remaining maturities of 60 days or less are valued at amortized cost, if it
approximates market value. In the event that amortized cost does not approximate
market value, market prices as determined above will be used.
The value of other assets and securities for which no quotations are readily
available (including restricted and unlisted foreign securities) and those
securities for which it is inappropriate to determine prices in accordance with
the above-stated procedures are determined in good faith at fair value using
methods determined by the Board of Directors. For purposes of calculating net
asset value per share, all assets and liabilities initially expressed in foreign
currencies will be translated into U.S. dollars at the mean of the bid price and
asked price of such currencies against the U.S. dollar last quoted by any major
bank.
Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends for the class. Dividends will differ by approximately the
amount of the distribution expense accrual differential among the classes. The
net asset value of Class B shares will generally be lower than the net asset
value of the Class A shares as a result of the distribution expense charged to
Class B shares.
PERFORMANCE INFORMATION
The Fund may from time to time advertise "total return" for each class of
the Portfolio. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT
INTENDED TO INDICATE FUTURE PERFORMANCE. The "total return" shows what an
investment in a class of the Portfolio would have earned over a specified period
of time (such as one, five or ten years) assuming that all distributions and
dividends by the portfolio were reinvested in the same class on the reinvestment
dates during the period. Total return does not take into account any federal or
state income taxes that may be payable on dividend and distributions or upon
redemption. The Fund may also include comparative performance information in
advertising or marketing a portfolio's shares. Such performance information may
include data from Lipper Analytical Services, Inc., other industry publications,
business periodicals, rating services and market indices.
The performance figures for Class B shares will generally be lower than
those for Class A shares because of the distribution fee charged to Class B
shares.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All income dividends and capital gains distributions for a class of shares
will automatically be reinvested in additional shares of such class at net asset
value, except that, upon written notice to the Fund or by checking off the
appropriate box in the Distribution Option Section on the Account Registration
Form, a shareholder may elect to receive income dividends and capital gains
distributions in cash. The Portfolio expects to distribute substantially all of
its net investment income in the form of quarterly dividends. Net realized
gains, if any, after reduction for any available tax loss carryforwards will
also be distributed annually. Confirmations of the purchase of shares of the
Portfolio through the automatic reinvestment of income dividends and capital
gains distributions
27
<PAGE>
will be provided, pursuant to Rule 10b-10(b) under the Securities Exchange Act
of 1934, as amended, on the next monthly client statement following such
purchase of shares. Consequently, confirmations of such purchases will not be
provided at the time of completion of such purchases as might otherwise be
required by Rule 10b-10.
Undistributed net investment income is included in a portfolio's net assets
for the purpose of calculating net asset value per share. Therefore, on the
"ex-dividend" date, the net asset value per share excludes the dividend (i.e.,
is reduced by the per share amount of the dividend). Dividends paid shortly
after the purchase of shares by an investor, although in effect a return of
capital, are taxable to shareholders subject to income tax.
Because of the distribution fee and any other expenses that may be
attributable to the Class B shares, the net income attributable to and the
dividends payable on Class B shares will be lower than the net income
attributable to and the dividends payable on Class A shares. As a result, the
net asset value per share of the classes of the Portfolio will differ at times.
Expenses of the Portfolio allocated to a particular class of shares thereof will
be borne on a pro rata basis by each outstanding share of that class.
TAXES
The following summary of certain federal income tax consequences is based on
current tax laws and regulations, which may be changed by legislative, judicial,
or administrative action.
No attempt has been made to present a detailed explanation of the federal,
state, or local income tax treatment of the Portfolio or its shareholders.
Accordingly, shareholders are urged to consult their tax advisors regarding
specific questions as to federal, state and local income taxes.
The Portfolio is treated as a separate entity for federal income tax
purposes and is not combined with the Fund's other portfolios. The Portfolio
intends to qualify for the special tax treatment afforded regulated investment
companies under Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"), so that the Portfolio will be relieved of federal income tax on
that part of its net investment income and net capital gain that is distributed
to shareholders.
The Portfolio distributes substantially all of its net investment income
(including, for this purpose, net short-term capital gain) to shareholders.
Dividends from the Portfolio's net investment income are taxable to shareholders
as ordinary income, whether received in cash or in additional shares. Such
dividends will generally qualify for the 70% dividends-received deduction for
corporate shareholders only to the extent of the aggregate qualifying dividend
income received by the Portfolio from U.S. corporations. The Portfolio will
report annually to its shareholders the amount of dividend income qualifying for
such treatment.
Distributions of net capital gain (the excess of net long-term capital gain
over net short-term capital loss) are taxable to shareholders as long-term
capital gain, regardless of how long shareholders have held their shares. The
Portfolio sends reports annually to shareholders of the federal income tax
status of all distributions made during the preceding year.
The Portfolio intends to make sufficient distributions or deemed
distributions of its ordinary income and capital gain net income (the excess of
short-term and long-term capital gains over short-term and long-term capital
losses), including any available capital loss carryforwards, prior to the end of
each calendar year to avoid liability for federal excise tax.
28
<PAGE>
Dividends and other distributions declared by the Portfolio in October,
November or December of any year and payable to shareholders of record on a date
in such month will be deemed to have been paid by the Portfolio and received by
the shareholders on December 31 of that year if the distributions are paid by
the Portfolio at any time during the following January.
The sale, exchange or redemption of shares may result in taxable gain or
loss to the selling, exchanging or redeeming shareholder, depending upon whether
the fair market value of the redemption proceeds exceeds or is less than the
shareholder's adjusted basis in the redeemed, exchanged or sold shares. If
capital gain distributions have been made with respect to shares that are sold
at a loss after being held for six months or less, then the loss is treated as a
long-term capital loss to the extent of the capital gain distributions.
The conversion of Class A shares to Class B shares should not be a taxable
event to the shareholder.
Shareholders are urged to consult with their tax advisors concerning the
application of state and local income taxes to investments in the Portfolio,
which may differ from the federal income tax consequences described above.
Investment income received by the Portfolio from sources within foreign
countries may be subject to foreign income taxes withheld at the source. To the
extent that the Portfolio is liable for foreign income taxes so withheld, the
Portfolio intends to operate so as to meet the requirements of the Code to pass
through to the shareholders credit for foreign income taxes paid. Although the
Portfolio intends to meet Code requirements to pass through credit for such
taxes, there can be no assurance that the Portfolio will be able to do so.
THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED HEREIN FOR GENERAL
INFORMATION ONLY. PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS
WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN THE PORTFOLIO.
PORTFOLIO TRANSACTIONS
The Sub-Advisory Agreement authorizes the Sub-Adviser, subject to the
supervision of the Adviser, to select the brokers or dealers that will execute
the purchases and sales of investment securities for the Portfolio and directs
the Sub-Adviser to use its best efforts to obtain the best available price and
most favorable execution with respect to all transactions for the Portfolio. The
Fund has authorized the Sub-Adviser to pay higher commissions in recognition of
brokerage services which, in the opinion of the Sub-Adviser, are necessary for
the achievement of better execution, provided the Sub-Adviser, subject to the
supervision of the Adviser believes this to be in the best interest of the Fund.
Since shares of the Portfolio are not marketed through intermediary brokers
or dealers, it is not the Fund's practice to allocate brokerage or principal
business on the basis of sales of shares which may be made through such firms.
However, the Sub-Adviser may place portfolio orders with qualified
broker-dealers who recommend the Fund's Portfolios or who act as agents in the
purchase of shares of the Portfolios for their clients.
In purchasing and selling securities for the Portfolio, it is the Fund's
policy to seek to obtain quality execution at the most favorable prices, through
responsible broker-dealers. In selecting broker-dealers to execute the
securities transactions for the Portfolio, consideration will be given to such
factors as the price of the security, the rate of the commission, the size and
difficulty of the order, the reliability, integrity, financial
29
<PAGE>
condition, general execution and operational capabilities of competing
broker-dealers, and the brokerage and research services which they provide to
the Fund. Some securities considered for investment by the Portfolio may also be
appropriate for other clients served by the Adviser or the Sub-Adviser. If
purchase or sale of securities consistent with the investment policies of the
Portfolio and one or more of these other clients served by the Adviser or
Sub-Adviser is considered at or about the same time, transactions in such
securities will be allocated among the Portfolio and such other clients in a
manner deemed fair and reasonable by the Sub-Adviser, subject to the supervision
of the Adviser. Although there is no specified formula for allocating such
transactions, the various allocation methods used by the Sub-Adviser, and the
results of such allocations, are subject to periodic review by the Fund's Board
of Directors.
Subject to the overriding objective of obtaining the best possible execution
of orders, the Sub-Adviser, subject to the supervision of the Adviser, may
allocate a portion of the Portfolio brokerage transactions to Morgan Stanley or
broker affiliates of Morgan Stanley. In order for Morgan Stanley or its
affiliates to effect any portfolio transactions for the Fund, the commissions,
fees or other remuneration received by Morgan Stanley or such affiliates must be
reasonable and fair compared to the commissions, fees or other remuneration paid
to other brokers in connection with comparable transactions involving similar
securities being purchased or sold on a securities exchange during a comparable
period of time. Furthermore, the Board of Directors of the Fund, including a
majority of the Directors who are not "interested persons," as defined in the
Investment Company Act of 1940, as amended (the "1940 Act"), have adopted
procedures which are reasonably designed to provide that any commissions, fees
or other remuneration paid to Morgan Stanley or such affiliates are consistent
with the foregoing standard.
Portfolio securities will not be purchased from or through, or sold to or
through, the Adviser, the Sub-Adviser or Morgan Stanley or any "affiliated
persons," as defined in the 1940 Act, of Morgan Stanley when such entities are
acting as principals, except to the extent permitted by law.
Although the Portfolio will not invest for short-term trading purposes,
investment securities may be sold from time to time without regard to the length
of time they have been held. The Portfolio anticipates that, under normal
circumstances, the annual portfolio turnover rate will not exceed 100%. High
portfolio turnover involves correspondingly greater transaction costs which will
be borne directly by the respective Portfolio. In addition, high portfolio
turnover may result in more capital gains which would be taxable to the
shareholders of the Portfolio.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
The Fund was organized as a Maryland corporation on June 16, 1988. The
Articles of Incorporation, as amended and restated, permit the Fund to issue up
to 34 billion shares of common stock, with $.001 par value per share. Pursuant
to the Fund's Articles of Incorporation, the Board of Directors may increase the
number of shares the Fund is authorized to issue without the approval of the
shareholders of the Fund. Subject to the notice period to shareholders with
respect to shares held by shareholders, the Board of Directors has the power to
designate one or more classes of shares of common stock and to classify and
reclassify any unissued shares with
30
<PAGE>
respect to such classes. The shares of common stock of each portfolio are
currently classified into two classes, the Class A shares and the Class B
shares, except for the International Small Cap, Money Market and Municipal Money
Market Portfolios, which only offer Class A shares.
The shares of the Portfolio, when issued, will be fully paid, nonassessable,
fully transferable and redeemable at the option of the holder. The shares have
no preference as to conversion, exchange, dividends, retirement or other
features and have no preemptive rights. The shares of the Portfolio have
non-cumulative voting rights, which means that the holders of more than 50% of
the shares voting for the election of Directors can elect 100% of the Directors
if they choose to do so. Persons or organizations owning 25% or more of the
outstanding shares of a portfolio may be presumed to "control" (as that term is
defined in the 1940 Act) that Portfolio. Under Maryland law, the Fund is not
required to hold an annual meeting of its shareholders unless required to do so
under the 1940 Act.
REPORTS TO SHAREHOLDERS
The Fund will send to its shareholders annual and semi-annual reports; the
financial statements appearing in annual reports are audited by independent
accountants. Monthly unaudited portfolio data is also available from the Fund
upon request.
In addition, the Adviser or its agent, as Transfer Agent, will send to each
shareholder having an account directly with the Fund a monthly statement showing
transactions in the account, the total number of shares owned, and any dividends
or distributions paid.
CUSTODIAN
As of September 1, 1995 domestic securities and cash are held by Chase,
which replaced U.S. Trust as the Fund's domestic custodian. Chase is not an
affiliate of the Adviser or the Distributor. Morgan Stanley Trust Company,
Brooklyn, New York, ("MSTC"), an affiliate of the Adviser and the Distributor,
acts as the Fund's custodian for foreign assets held outside the United States
and employs subcustodians approved by the Board of Directors of the Fund in
accordance with regulations of the Securities and Exchange Commission for the
purpose of providing custodial services for such assets. MSTC may also hold
certain domestic assets for the Fund. For more information on the custodians,
see "General Information -- Custody Arrangements" in the Statement of Additional
Information.
DIVIDEND DISBURSING AND TRANSFER AGENT
Chase Global Funds Services Company, 73 Tremont Street, Boston,
Massachusetts 02108-3913, acts as Dividend Disbursing and Transfer Agent for the
Fund.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP serves as independent accountants for the Fund and
audits its annual financial statements.
LITIGATION
The Fund is not involved in any litigation.
31
<PAGE>
<TABLE>
<CAPTION>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
GOLD PORTFOLIO
P.O. BOX 2798, BOSTON, MA 02208-2798
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ACCOUNT REGISTRATION FORM
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<S> <C>
ACCOUNT INFORMATION If you need assistance in filling out this form
Fill in where applicable for the Morgan Stanley Institutional Fund, please
contact your Morgan Stanley representative or call
us toll free 1-(800)-548-7786. Please print all
items except signature, and mail to the Fund at the
address above.
- ---------------------------------------------------------------------------------------------------------------
A) REGISTRATION
1. INDIVIDUAL 1. / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
First Name Initial Last Name
2. JOINT TENANTS 2. / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
(RIGHTS OF First Name Initial Last Name
SURVIVORSHIP / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
PRESUMED UNLESS First Name Initial Last Name
TENANCY IN COMMON
IS INDICATED)
- ---------------------------------------------------------------------------------------------------------------
3. CORPORATIONS, 3. / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
TRUSTS AND OTHERS
Please call the / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
Fund for additional
documents that may / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
be required to set
up account and to
authorize transactions.
Type of / / INCORPORATED / / UNINCORPORATED / / PARTNERSHIP / / UNIFORM GIFT/TRANSFER TO MINOR
Registration: ASSOCIATION (ONLY ONE CUSTODIAN AND MINOR PERMITTED)
/ / TRUST __________________________________ / / OTHER (Specify) ______________________________
- ---------------------------------------------------------------------------------------------------------------
B) MAILING ADDRESS Street or P.O. Box / / / / / / / / / / / / / / / / / / / / / / / / / / / /
Please fill in
completely, including City / / / / / / / / / / / / / State / / / Zip / / / / / /-/ / / / / / / /
telephone number(s).
Home Business
Telephone No./ / / /-/ / / /-/ / / / / Telephone No./ / / /-/ / / /-/ / / /
/ / United States / / Resident / /Non-Resident Alien:
Citizen Alien Indicate Country of Residence _________
- ---------------------------------------------------------------------------------------------------------------
C) TAXPAYER PART 1. Enter your Taxpayer C) IMPORTANT TAX INFORMATION
IDENTIFICATION Identification Number. For most You (as a payee) are required by
NUMBER individual taxpayers, this is your law to provide us (as payer) with
If the account is in Social Security Number. your correct Taxpayer Identification
more than one name, TAXPAYER IDENTIFICATION NUMBER Number. Accounts that have a missing
CIRCLE THE NAME OF THE / / / /-/ / / / / / / / / or incorrect Taxpayer Identification
PERSON WHOSE TAXPAYER OR Number will be subject to backup
IDENTIFICATION NUMBER SOCIAL SECURITY NUMBER withholding at a 31% rate on dividends,
IS PROVIDED IN SECTION / / / /-/ / /-/ / / / / distributions and other payments.
A) ABOVE. If no name PART 2. BACKUP WITHHOLDING If you have not provided us with
is circled, the number / / Check this box if you are your correct taxpayer identification
will be considered to be NOT subject to Backup number, you may be subject to
that of the last name Withholding under the a $50 penalty imposed by the Internal
listed. For Custodian provisions of Section Revenue Service.
account of a minor 3406(a)(1)(C) of the Internal Backup withholding is not an
(Uniform Gift/Transfer Revenue Code. additional tax; the tax liability of
to Minor Act), give the persons subject to backup withholding
Social Security Number will be reduced by the amount of tax
of the minor. withheld. If withholding results in
an overpayment of taxes, a refund
may be obtained. You may be notified
that you are subject to backup
withholding under Section 3406(a)(1)(C)
of the Internal Revenue Code because you
have underreported interest or dividends
or you were required to but failed to
file a return which would have included a
reportable interest or dividend payment. IF
YOU HAVE NOT BEEN SO NOTIFIED, CHECK THE
BOX IN PART 2 AT LEFT.
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D) PORTFOLIO AND For Purchase of the following Portfolio:
CLASS SELECTION Gold Portfolio / / Class A Shares $____ / / Class B Shares $____
(Class A shares
minimum $500,000
for each Portfolio Total Initial Investment $_____________
and Class B shares
minimum $100,000 for
each Portfolio).
Please indicate
class and amount.
- ---------------------------------------------------------------------------------------------------------------
E) METHOD OF Payment by:
INVESTMENT / / Check (MAKE CHECK PAYABLE TO MORGAN STANLEY INSTITUTIONAL FUND, INC.--GOLD PORTFOLIO)
Please
indicate
manner of / / Exchange $____________ From________________ / / / / / / / / / / /-/ /
payment. Name of Portfolio Account No.
/ / Account previously established by:
/ / Phone exchange / / Wire on___________________ / / / / / / / / / / / /-/ /
Date Account No. (Check
(Previously assigned by the Fund) Digit)
<PAGE>
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F) DISTRIBUTION Income dividends and capital gains distributions (if any) will
OPTION be reinvested in additional shares unless either box below is
checked.
/ / Income dividends to be paid in cash, capital
gains distributions (if any) in shares.
/ / Income dividends and capital gains distributions
(if any) to be paid in cash.
- ---------------------------------------------------------------------------------------------------------------
G) TELEPHONE / / I/we hereby authorize the Fund and its ______________________ ________________
REDEMPTION agents to honor any telephone requests Name of COMMERCIAL Bank Bank Account No.
Please select at time of to wire redemption proceeds to the (Not Savings Bank)
initial application if you commercial bank indicated at rightand/or
wish to redeem shares by mail redemption proceeds to the name and ________________
telephone. A SIGNATURE address in which my/our fund account is Bank ABA No.
GUARANTEE IS REQUIRED IF registered if such requests are believed
BANK ACCOUNT IS NOT to be authentic. _________________________________________________
REGISTERED IDENTICALLY TO The Fund and the Fund's Transfer Agent will Name(s) in which your BANK Account is Established
YOUR FUND ACCOUNT. employ reasonable procedures to confirm that
instructions communicated by telephone are _________________________________________________
TELEPHONE REQUESTS FOR genuine. These procedures include requiring Bank's Street Address
REDEMPTIONS WILL NOT BE the investor to provide certain personal
HONORED UNLESS THE BOX IS identification information at the time an _________________________________________________
CHECKED. account is opened and prior to effecting each City State Zip
transaction requested by telephone. In addition,
all telephone transaction requests will be recorded
and investors may be required to provide additional
telecopied written instructions of transaction
requests. Neither the Fund nor the Transfer Agent will
be responsible for any loss, liability, cost or expense
for following instructions received by telephone that
it reasonably believes to be genuine.
- ---------------------------------------------------------------------------------------------------------------
H) INTERESTED PARTY
OPTION
In addition to the account _________________________________________________________________
statement sent to my/our Name
registered address, I/we _________________________________________________________________
hereby authorize the fund
to mail duplicate _________________________________________________________________
statements to the name and Address
address provided at right.
_________________________________________________________________
City State Zip Code
- ---------------------------------------------------------------------------------------------------------------
I) DEALER
INFORMATION _______________________ _______________________________ ___________
Representative Name Representative No. Branch No.
- ---------------------------------------------------------------------------------------------------------------
J) SIGNATURE OF The undersigned certify(ies) that I/we have full authority and legal
ALL HOLDERS capacity to purchase and redeem shares of the Fund and affirm that I/we
AND TAXPAYER have received a current Prospectus of the Morgan Stanley Institutional
CERTIFICATION Fund, Inc. and agree to be bound by its terms. UNDER THE PENALTIES OF
Sign Here > PERJURY, I/WE CERTIFY THAT THE INFORMATION PROVIDED IN SECTION C)
ABOVE IS TRUE, CORRECT AND COMPLETE.
(X) (X)
__________________________________ ______________________________________
Signature Date Signature Date
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</TABLE>
<PAGE>
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- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND OR THE DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER BY THE FUND OR THE DISTRIBUTOR TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION.
--------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
PAGE
----
Fund Expenses..................................... 2
Financial Highlights.............................. 4
Prospectus Summary................................ 6
Investment Objective and Policies................. 10
Additional Investment Information................. 11
Investment Limitations............................ 17
Management of the Fund............................ 17
Purchase of Shares................................ 20
Redemption of Shares.............................. 24
Shareholder Services.............................. 25
Valuation of Shares............................... 26
Performance Information........................... 27
Dividends and Capital Gains Distributions......... 27
Taxes............................................. 28
Portfolio Transactions............................ 29
General Information............................... 30
Account Registration Form
</TABLE>
GOLD PORTFOLIO
A PORTFOLIO OF THE
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
Common Stock
($.001 PAR VALUE)
-------------
PROSPECTUS
-------------
Investment Adviser
Morgan Stanley
Asset Management Inc.
Sub-Adviser
Sun Valley Gold Company
Distributor
Morgan Stanley & Co.
Incorporated
- ---------------------------------
- ---------------------------------
- ---------------------------------
- ---------------------------------
<PAGE>
- --------------------------------------------------------------------------------
P R O S P E C T U S
-------------------------------------------------------------------------
GLOBAL EQUITY PORTFOLIO
INTERNATIONAL EQUITY PORTFOLIO
INTERNATIONAL SMALL CAP PORTFOLIO
ASIAN EQUITY PORTFOLIO
EUROPEAN EQUITY PORTFOLIO
JAPANESE EQUITY PORTFOLIO
LATIN AMERICAN PORTFOLIO
PORTFOLIOS OF THE
MORGAN STANLEY INSTITUTIONAL FUND, INC.
P.O. BOX 2798, BOSTON, MASSACHUSETTS 02208-2798
FOR INFORMATION CALL 1-800-548-7786
----------------
Morgan Stanley Institutional Fund, Inc (the "Fund") is a no-load, open-end
management investment company, or mutual fund, which offers redeemable shares in
a series of diversified and non-diversified investment portfolios
("portfolios"). The Fund currently consists of twenty-eight portfolios
representing a broad range of investment choices. The Fund is designed to
provide clients with attractive alternatives for meeting their investment needs.
This prospectus (the "Prospectus") pertains to the Class A and the Class B
shares of the Global Equity, International Equity, Asian Equity, European
Equity, Japanese Equity and Latin American Portfolios (the "Multiclass
Portfolios") and to the Class A Shares of the International Small Cap Portfolio
(collectively, the "Portfolios"). On January 2, 1996, the Multiclass Portfolios
began offering two classes of shares, the Class A shares and the Class B shares,
except for the Money Market, Municipal Money Market and International Small Cap
Portfolios which only offer Class A shares. All shares of the Portfolios owned
prior to January 2, 1996 were redesignated Class A shares on January 2, 1996.
The International Equity Portfolio is currently closed to new investors with the
exception of certain Morgan Stanley customers. The Class A and Class B shares
currently offered by the Portfolios have different minimum investment
requirements and fund expenses. Shares of the portfolios are offered with no
sales charge or exchange or redemption fee (with the exception of the
International Small Cap Portfolio).
The GLOBAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of issuers throughout the world,
including U.S. issuers.
The INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers.
The INTERNATIONAL SMALL CAP PORTFOLIO seeks long-term capital appreciation
by investing primarily in equity securities of non-U.S. issuers with equity
market capitalizations of less than $1 billion.
The ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of Asian issuers.
The EUROPEAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of European issuers.
The JAPANESE EQUITY PORTFOLIO seeks long-term capital appreciation through
investment in equity securities of Japanese issuers.
The LATIN AMERICAN PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Latin American issuers and in debt
securities issued or guaranteed by Latin American governments or governmental
entities.
INVESTORS SHOULD NOTE THAT EACH PORTFOLIO MAY INVEST UP TO 10% OF ITS TOTAL
ASSETS IN RESTRICTED SECURITIES, AND THE INTERNATIONAL SMALL CAP AND LATIN
AMERICAN PORTFOLIOS MAY INVEST UP TO 25% OF THEIR RESPECTIVE TOTAL ASSETS IN
RESTRICTED SECURITIES THAT ARE RULE 144A SECURITIES. SEE "ADDITIONAL INVESTMENT
INFORMATION -- NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED
SECURITIES." INVESTMENTS IN RESTRICTED SECURITIES IN EXCESS OF 5% OF A
PORTFOLIO'S TOTAL ASSETS MAY BE CONSIDERED A SPECULATIVE ACTIVITY, MAY INVOLVE
GREATER RISK AND MAY INCREASE THE PORTFOLIO'S EXPENSES.
The Fund is designed to meet the investment needs of discerning investors
who place a premium on quality and personal service. With Morgan Stanley Asset
Management Inc. as Adviser and Administrator (the "Adviser" and the
"Administrator"), and with Morgan Stanley & Co. Incorporated ("Morgan Stanley")
as Distributor, the Fund makes available to institutional and high net worth
individual investors a series of portfolios which benefit from the investment
expertise and commitment to excellence associated with Morgan Stanley and its
affiliates.
This Prospectus is designed to set forth concisely the information about the
Fund that a prospective investor should know before investing and it should be
retained for future reference. The Fund offers additional portfolios which are
described in other prospectuses and under "Prospectus Summary" below. The Fund
currently offers the following portfolios: (i) GLOBAL AND INTERNATIONAL EQUITY
- -- Active Country Allocation, Asian Equity, Emerging Markets, European Equity,
Global Equity, Gold, International Equity, International Magnum, International
Small Cap, Japanese Equity and Latin American Portfolios; (ii) U.S. EQUITY --
Aggressive Equity, Emerging Growth, Equity Growth, MicroCap, Small Cap Value
Equity, U.S. Real Estate and Value Equity Portfolios; (iii) EQUITY AND FIXED
INCOME -- Balanced Portfolio; (iv) FIXED INCOME -- Emerging Markets Debt, Fixed
Income, Global Fixed Income, High Yield, Mortgage-Backed Securities and
Municipal Bond Portfolios; and (v) MONEY MARKET -- Money Market and Municipal
Money Market Portfolios. Additional information about the Fund is contained in a
"Statement of Additional Information," dated May 1, 1996, which is incorporated
herein by reference. The Statement of Additional Information and the
prospectuses pertaining to the other portfolios of the Fund are available upon
request and without charge by writing or calling the Fund at the address and
telephone number set forth above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1996.
<PAGE>
FUND EXPENSES
The following table illustrates the expenses and fees that a shareholder of
each Portfolio listed below will incur.
<TABLE>
<CAPTION>
GLOBAL EQUITY INTERNATIONAL EQUITY INTERNATIONAL SMALL ASIAN EQUITY
SHAREHOLDER TRANSACTION EXPENSES PORTFOLIO PORTFOLIO CAP PORTFOLIO PORTFOLIO
- --------------------------------------------- --------------- --------------------- ------------------- -----------------
<S> <C> <C> <C> <C>
Maximum Sales Load Imposed on Purchases
Class A.................................... None None None* None
Class B.................................... None None None* None
Maximum Sales Load Imposed on Reinvested
Dividends
Class A.................................... None None None None
Class B.................................... None None N/A None
Deferred Sales Load
Class A.................................... None None None None
Class B.................................... None None N/A None
Redemption Fees
Class A.................................... None None 1.00%* None
Class B.................................... None None 1.00%* None
Exchange Fees
Class A.................................... None None None None
Class B.................................... None None N/A None
<CAPTION>
EUROPEAN EQUITY JAPANESE EQUITY LATIN AMERICAN
SHAREHOLDER TRANSACTION EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO
- --------------------------------------------- --------------------- ------------------- -----------------
<S> <C> <C> <C> <C>
Maximum Sales Load Imposed on Purchases
Class A..................................................... None None None
Class B..................................................... None None None
Maximum Sales Load Imposed on Reinvested Dividends
Class A..................................................... None None None
Class B..................................................... None None None
Deferred Sales Load
Class A..................................................... None None None
Class B..................................................... None None None
Redemption Fees
Class A..................................................... None None None
Class B..................................................... None None None
Exchange Fees
Class A..................................................... None None None
Class B..................................................... None None None
</TABLE>
- --------------------------
* Shareholders of the International Small Cap Portfolio are charged a 1.00%
transaction fee, which is payable directly to the International Small Cap
Portfolio, in connection with each purchase and redemption of shares of the
Portfolio. The transaction fee is intended to allocate transaction costs
associated with purchases and redemptions of shares of the Portfolio to
investors actually making such purchases and redemptions rather than to the
Portfolio's other shareholders. The 1.00% fee represents the Adviser's
estimate of such transaction costs, which include the costs of acquiring and
disposing of Portfolio securities. The transaction fee is not a sales charge
or load, and is retained by the Portfolio. The fee does not apply to
Portfolios of the Fund other than the International Small Cap Portfolio and is
not charged in
2
<PAGE>
connection with the reinvestment of dividends or capital gain distributions.
The fee will not be charged with respect to purchases and redemptions that do
not result in actual transaction costs to the Portfolio. Examples of such
transactions include offsetting purchases and redemptions by different
shareholders occurring at the same time and in-kind purchases and redemptions.
<TABLE>
<CAPTION>
INTERNATIONAL
GLOBAL EQUITY EQUITY INTERNATIONAL SMALL ASIAN EQUITY
ANNUAL FUND OPERATING EXPENSES PORTFOLIO PORTFOLIO CAP PORTFOLIO PORTFOLIO
- ------------------------------------------------ ------------- ------------------- ------------------- --------------
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<S> <C> <C> <C> <C>
Management Fee (Net of Fee Waivers)***
Class A....................................... 0.67% 0.77% 0.86% 0.62%
Class B....................................... 0.67% 0.77% N/A 0.62%
12b-1 Fees
Class A....................................... None None None None
Class B....................................... 0.25% 0.25% N/A 0.25%
Other Expenses
Class A....................................... 0.33% 0.23% 0.29% 0.38%
Class B....................................... 0.33% 0.23% N/A 0.38%
------------- ------- ------- --------------
Total Operating Expenses (Net of Fee Waivers)*
Class A....................................... 1.00% 1.00% 1.15% 1.00%
Class B....................................... 1.25% 1.25% N/A 1.25%
------------- ------- ------- --------------
------------- ------- ------- --------------
<CAPTION>
EUROPEAN EQUITY JAPANESE EQUITY LATIN AMERICAN
ANNUAL FUND OPERATING EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO
- ------------------------------------------------ ------------------- ------------------- --------------
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<S> <C> <C> <C> <C>
Management Fee (Net of Fee Waivers)***
Class A...................................................... 0.55% 0.60% 0.00%
Class B...................................................... 0.55% 0.60% 0.00%
12b-1 Fees
Class A...................................................... None None None
Class B...................................................... 0.25% 0.25% 0.25%
Other Expenses
Class A...................................................... 0.45% 0.40% 1.70%**
Class B...................................................... 0.45% 0.40% 1.70%**
------- ------- --------------
Total Operating Expenses (Net of Fee Waivers)
Class A...................................................... 1.00% 1.00% 1.70%**
Class B...................................................... 1.25% 1.25% 1.95%**
------- ------- --------------
-------
</TABLE>
- --------------------------
* "Other Expenses" for the Latin American Portfolio includes an annual fee of
0.125% of the Portfolios' average weekly net assets paid to local
administrators required under Brazilian and Chilean law. See "Local
Administrators for the Latin American Portfolio".
** Annualized.
*** The Adviser has agreed to waive its management fees and/or reimburse each
Portfolio, if necessary, if such fees would cause any of the total annual
operating expenses of the Portfolios to exceed a specified percentage of
their respective average daily net assets. Set forth
3
<PAGE>
below, for each Portfolio as applicable, are the management fees and total
operating expenses absent such fee waivers and/or expense reimbursements as
a percent of average daily net assets of the Class A shares of the
Portfolios and Class B Shares of the Multiclass Portfolios, respectively.
<TABLE>
<CAPTION>
TOTAL OPERATING EXPENSES
ABSENT FEE WAIVERS
MANAGEMENT
FEES ABSENT FEE --------------------------
PORTFOLIO WAIVERS CLASS A CLASS B+
- ---------------------------------------------------------------- ---------------- ------------ ------------
<S> <C> <C> <C>
Global Equity................................................... 0.80% 1.13% 1.38%
International Equity............................................ 0.80% 1.03% 1.28%
International Small Cap......................................... 0.95% 1.24% N/A
Asian Equity.................................................... 0.80% 1.18% 1.43%
European Equity................................................. 0.80% 1.25% 1.50%
Japanese Equity................................................. 0.80% 1.20% 1.45%
Latin American.................................................. 1.10% 3.13%++ 3.38%++
</TABLE>
- ------------------------------
+ Estimated.
++ Annualized.
These reductions became effective as of the inception of each Portfolio,
except with respect to the International Equity Portfolio, as to which the
effective date was February 15, 1990. As a result of these reductions, the
Management Fees stated above are lower than the contractual fees stated under
"Management of the Fund." For further information on Fund expenses, see
"Management of the Fund."
The purpose of the table is to assist the investor in understanding the
various expenses that an investor in the Portfolios will bear directly or
indirectly. The Class A expenses and fees for Portfolios are based on actual
figures for the fiscal year ended December 31, 1995. The Class B expenses and
fees for the Multiclass Portfolios are based on estimates assuming that the
average daily net assets of the Class B shares of each Multiclass Portfolio will
be $50,000,000. "Other Expenses" include Board of Directors' fees and expenses,
amortization or organizational costs, filing fees, professional fees and costs
for shareholder reports. Due to the continuous nature of Rule 12b-1 fees, long
term Class B shareholders may pay more than the equivalent of the maximum
front-end sales charges otherwise permitted by the Rules of Fair Practice of the
National Association of Securities Dealers, Inc. ("NASD").
4
<PAGE>
The following example illustrates the expenses that you would pay on a
$1,000 investment assuming (1) a 5% rate of return and (2) redemption at the end
of each time period. As noted above, the only fee charged by the Fund upon
purchase or redemption of Fund shares is the 1% transaction fee assessed on
purchases and redemptions of shares of the International Small Cap Portfolio,
which charges are reflected in this example. The example is based on total
operating expenses of the Portfolios after fee waivers.
<TABLE>
<CAPTION>
3 5 10
1 YEAR YEARS YEARS YEARS
------ ------ ------ -------
<S> <C> <C> <C> <C>
Global Equity Portfolio
Class A.......................... $ 10 $ 32 $ 55 $ 122
Class B.......................... 13 40 69 151
International Equity Portfolio
Class A.......................... 10 32 55 122
Class B.......................... 13 40 69 151
International Small Cap Portfolio
Class A.......................... 32 57 85 163
Asian Equity Portfolio
Class A.......................... 10 32 55 122
Class B.......................... 13 40 69 151
European Equity Portfolio
Class A.......................... 10 32 55 122
Class B.......................... 13 40 69 151
Japanese Equity Portfolio
Class A.......................... 10 32 55 122
Class B.......................... 13 40 69 151
Latin American Portfolio
Class A.......................... 17 54 92 201
Class B.......................... 20 61 105 227
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
The Fund intends to continue to comply with all state laws that restrict
investment company expenses. Currently, the most restrictive state law requires
that the aggregate annual expenses of an investment company shall not exceed two
and one-half percent (2 1/2%) of the first $30 million of average net assets,
two percent (2%) of the next $70 million of average net assets, and one and
one-half percent (1 1/2%) of the remaining net assets of such investment
company.
The Adviser has agreed to a reduction in the amounts payable to it, and to
reimburse any Portfolio, if necessary, if in any fiscal year the sum of the
Portfolio's expenses exceeds the limit set by applicable state law.
5
<PAGE>
FINANCIAL HIGHLIGHTS
The following table provides financial highlights for the Class A shares of
the Portfolios for each of the periods presented. The audited financial
highlights for the Class A shares for the fiscal year ended December 31, 1995
are part of the Fund's financial statements which appear in the Fund's December
31, 1995 Annual Report to Shareholders and which are included in the Fund's
Statement of Additional Information. The Portfolios' financial highlights for
each of the periods in the five years ended December 31, 1995 have been audited
by Price Waterhouse, LLP, whose unqualified report thereon is also included in
the Statement of Additional Information. Additional performance information for
the Class A shares is included in the Annual Report. The Annual Report and the
financial statements therein, along with the Statement of Additional
Information, are available at no cost from the Fund at the address and telephone
number noted on the cover page of this Prospectus. Financial highlights are not
available for the new Class B shares since they were not offered as of December
31, 1995. Subsequent to October 31, 1992 (the Fund's prior fiscal year end) the
Fund changed its fiscal year end to December 31. The following information
should be read in conjunction with the financial statements and notes thereto.
6
<PAGE>
GLOBAL EQUITY PORTFOLIO
<TABLE>
<CAPTION>
JULY 15, TWO MONTHS
1992* TO ENDED YEAR ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1992 1992 1993 1994 1995
----------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD............ $ 10.00 $ 9.35 $ 9.75 $ 13.87 $ 13.40
----------- ------------- ------------- ------------- -------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1)(2).................. 0.02 0.01 0.08 0.08 0.18
Net Realized and Unrealized Gain/(Loss) on
Investments.................................. (0.67) 0.39 4.18 0.79 2.26
----------- ------------- ------------- ------------- -------------
Total from Investment Operations.............. (0.65) 0.40 4.26 0.87 2.44
----------- ------------- ------------- ------------- -------------
DISTRIBUTIONS
Net Investment Income......................... -- -- (0.02) (0.12) (0.22)
In Excess of Net Investment Income............ -- -- (0.03) -- --
Net Realized Gain............................. -- -- (0.09) (1.22) (1.31)
----------- ------------- ------------- ------------- -------------
Total Distributions............................. -- -- (0.14) (1.34) (1.53)
----------- ------------- ------------- ------------- -------------
NET ASSET VALUE, END OF PERIOD.................. $ 9.35 $ 9.75 $ 13.87 $ 13.40 $ 14.31
----------- ------------- ------------- ------------- -------------
----------- ------------- ------------- ------------- -------------
TOTAL RETURN.................................... (6.50)% 4.28% 44.24% 6.95% 18.66%
----------- ------------- ------------- ------------- -------------
----------- ------------- ------------- ------------- -------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)........... $ 11,257 $ 11,739 $ 19,918 $ 78,935 $ 91,675
Ratio of Expenses to Average Net Assets
(1)(2)......................................... 1.00%** 1.00%** 1.00% 1.00% 1.00%
Ratio of Net Investment Income to Average Net
Assets (1)..................................... 1.00%** 0.69%** 0.84% 0.87% 1.17%
Portfolio Turnover Rate......................... 10% 5% 42% 12% 28%
</TABLE>
- ------------------------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net investment income........ $ 0.08 $ 0.02 $ 0.01 $ 0.02 $ 0.02
Ratios before expense limitation:
Expenses to Average Net Assets.................... 5.22%** 2.49%** 1.66% 1.24% 1.13%
Net Investment Income (Loss) to Average
Net Assets..................................... (3.22)%** (0.80)%** 0.18% 0.63% 1.04%
</TABLE>
(2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled
to receive a management fee calculated at an annual rate of 0.80% of the
average daily net assets of the Global Equity Portfolio. The Adviser has
agreed to waive a portion of this fee and/or reimburse expenses of the
Portfolio to the extent that the total operating expenses of the Portfolio
exceed 1.00% of the average daily net assets of the Class A shares and 1.25%
of the average daily net assets of the Class B shares. In the fiscal period
ended October 31, 1992, the two months ended December 31, 1992, and the
years ended December 31, 1993, 1994 and 1995, the Adviser waived management
fees and/or reimbursed expenses totalling $97,000, $28,000, $101,000,
$126,000 and $109,000, respectively, for the Global Equity Portfolio.
* Commencement of Operations.
** Annualized.
7
<PAGE>
INTERNATIONAL EQUITY PORTFOLIO
<TABLE>
<CAPTION>
TWO
AUGUST 4, MONTHS YEAR
1989* TO YEAR YEAR YEAR ENDED ENDED
OCTO- ENDED OCTO- ENDED OCTO- ENDED OCTO- DECEM- DECEM-
BER 31, BER 31, BER 31, BER 31, BER 31, BER 31,
1989 1990 1991 1992 1992 1993
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD............... $ 10.00 $ 9.72 $ 10.05 $ 10.52 $ 9.83 $ 9.98
----------- ----------- ----------- ----------- ----------- -----------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income............................ 0.05 0.19 0.12 0.12 0.01 0.15
Net Realized and Unrealized Gain/(Loss) on
Investments..................................... (0.33) 0.20 0.58 (0.59) 0.14 4.36
----------- ----------- ----------- ----------- ----------- -----------
Total from Investment Operations................. (0.28) 0.39 0.70 (0.47) 0.15 4.51
----------- ----------- ----------- ----------- ----------- -----------
DISTRIBUTIONS
Net Investment Income............................ -- (0.06) (0.15) (0.17) -- (0.01)
In Excess of Net Investment Income............... -- -- -- -- -- (0.13)
Net Realized Gain................................ -- -- (0.08) (0.05) -- (0.26)
----------- ----------- ----------- ----------- ----------- -----------
Total Distributions................................ -- (0.06) (0.23) (0.22) -- (0.40)
----------- ----------- ----------- ----------- ----------- -----------
NET ASSET VALUE, END OF PERIOD..................... $ 9.72 $ 10.05 $ 10.52 $ 9.83 $ 9.98 $ 14.09
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
TOTAL RETURN....................................... (2.80)% 3.99% 7.17% (4.56)% 1.53% 46.50%
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands).............. $ 7,811 $ 110,716 $ 283,776 $ 486,836 $ 510,727 $ 947,045
Ratio of Expenses to Average Net
Assets (1)(2)..................................... 1.35%** 1.03% 1.00% 1.00% 1.00%** 1.00%
Ratio of Net Investment Income to Average Net
Assets (1)(2)..................................... 2.34% 3.51% 2.27% 1.46% 0.68%** 1.25%
Portfolio Turnover Rate............................ 0% 38% 22% 12% 5% 23%
<CAPTION>
YEAR YEAR
ENDED DECEM- ENDED DECEM-
BER 31, BER 31,
1994 1995
------------ ------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD............... $ 14.09 $ 15.34
------------ ------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income............................ 0.16 0.16
Net Realized and Unrealized Gain/(Loss) on
Investments..................................... 1.54 1.55
------------ ------------
Total from Investment Operations................. 1.70 1.71
------------ ------------
DISTRIBUTIONS
Net Investment Income............................ (0.18) (0.06)
In Excess of Net Investment Income............... -- --
Net Realized Gain................................ (0.27) (1.84)
------------ ------------
Total Distributions................................ (0.45) (1.90)
------------ ------------
NET ASSET VALUE, END OF PERIOD..................... $ 15.34 $ 15.15
------------ ------------
------------ ------------
TOTAL RETURN....................................... 12.39% 11.77%
------------ ------------
------------ ------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands).............. $1,304,770 $1,598,503
Ratio of Expenses to Average Net
Assets (1)(2)..................................... 1.00% 1.00%
Ratio of Net Investment Income to Average Net
Assets (1)(2)..................................... 1.12% 1.38%
Portfolio Turnover Rate............................ 16% 27%
</TABLE>
- ------------------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net investment
income............................... $ 0.00+ $ 0.01 $ 0.01 $ 0.00+ $ 0.00+ $ 0.01
Ratios before expense limitation:
Expenses to Average Net Assets........ 2.58%** 1.24% 1.09% 1.02% 1.14%** 1.06%
Net Investment Income to Average Net
Assets............................... 1.11%** 3.30% 2.18% 1.44% 0.54%** 1.19%
<CAPTION>
(1) Effect of voluntary expense limitation d
<S> <C> <C>
Per share benefit to net investment
income............................... $ 0.004 $ 0.003
Ratios before expense limitation:
Expenses to Average Net Assets........ 1.03% 1.03%
Net Investment Income to Average Net
Assets............................... 1.09% 1.35%
</TABLE>
+ Per share benefit to net investment income is less than $0.0001.
(2)Under the terms of an Investment Advisory Agreement, the Adviser is entitled
to receive a management fee calculated at an annual rate of 0.80% of the
average daily net assets of the International Equity Portfolio. The Adviser
has agreed to waive a portion of this fee and/or reimburse expenses of the
Portfolio to the extent that the total operating expenses of the Portfolio
exceed 1.00% of the average daily net assets of the Class A shares and 1.25%
of the average daily net assets of the Class B shares. In the year ended
October 31, 1991, the year ended October 31, 1992, the two months ended
December 31, 1992, and the years ended December 31, 1993, 1994 and 1995, the
Adviser waived management fees and/or reimbursed expenses totaling $147,000,
$78,000, $116,000, $405,000, $344,000 and $424,000, respectively, for the
International Equity Portfolio.
* Commencement of Operations.
** Annualized.
8
<PAGE>
INTERNATIONAL SMALL CAP PORTFOLIO
<TABLE>
<CAPTION>
DECEMBER 15,
1992* TO YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1992 1993+ 1994 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD......... $ 10.00 $ 10.09 $ 14.64 $ 15.15
------ ------------- ------------- -------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1)(3)............... 0.01 0.09 0.14 0.24
Net Realized and Unrealized Gain on
Investments (2)........................... 0.08 4.48 0.62 0.15
------ ------------- ------------- -------------
Total from Investment Operations........... 0.09 4.57 0.76 0.39
------ ------------- ------------- -------------
DISTRIBUTIONS
Net Investment Income...................... -- 0.00 (0.03) (0.23)
In Excess of Net Investment Income......... -- (0.02) -- --
Net Realized Gain.......................... -- -- (0.22) (0.37)
Total Distributions.......................... -- (0.02) (0.25) (0.60)
------ ------------- ------------- -------------
NET ASSET VALUE, END OF PERIOD $ 10.09 $ 14.64 $ 15.15 $ 14.94
------ ------------- ------------- -------------
------ ------------- ------------- -------------
TOTAL RETURN................................. 0.90% 45.34% 5.25% 2.60%
------ ------------- ------------- -------------
------ ------------- ------------- -------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)........ $ 3,824 $ 52,834 $ 160,101 $ 198,669
Ratio of Expenses to Average Net Assets
(1)(3)...................................... 1.15%** 1.15% 1.15% 1.15%
Ratio of Net Investment Income to
Average Net Assets (1)(3)................... 1.37%** 0.66% 1.18% 1.72%
Portfolio Turnover Rate...................... 0% 14% 8% 24%
</TABLE>
- ------------------------------
<TABLE>
<S> <C> <C> <C> <C> <C>
(1) Effect of voluntary expense limitation during the
period:
Per share benefit to net investment
income.................................. $ 0.16 $ 0.10 $ 0.02 $ 0.01
Ratios before expense limitation:
Expenses to Average Net Assets........... 21.67%** 1.86% 1.29% 1.24%
Net Investment Income/(Loss) to Average
Net Assets.............................. (19.15)%** (0.05)% 1.04% 1.63%
</TABLE>
(2) Includes a 1% transaction fee on purchases and redemptions of capital
shares.
(3) Under the terms of an Investment Advisory Agreement, the Adviser is entitled
to receive a management fee calculated at an annual rate of 0.95% of the
average daily net assets of the Class A shares of the Portfolio. The Adviser
has agreed to waive a portion of this fee and/or reimburse expenses of the
Portfolio to the extent that the total operating expenses of the Portfolio
exceed 1.15% of the average daily net assets of the Class A shares of the
Portfolio. In the period ended December 31, 1992, and the years ended
December 31, 1993, 1994 and 1995, the Adviser waived management fees and/or
reimbursed expenses totaling $32,000, $151,000, $174,000 and $181,000,
respectively, for the International Small Cap Portfolio.
* Commencement of Operations.
** Annualized.
+ Per share amounts for the year ended December 31, 1993 are based on average
outstanding shares.
9
<PAGE>
ASIAN EQUITY PORTFOLIO
<TABLE>
<CAPTION>
TWO
JULY 1, YEAR MONTHS YEAR YEAR YEAR
1991, TO ENDED ENDED ENDED ENDED ENDED
OCTOBER OCTOBER DECEMBER DECEMBER DECEMBER DECEMBER
31, 1991 31, 1992 31, 1992 31, 1993 31, 1994 31, 1995
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD......... $ 10.00 $ 9.67 $ 13.63 $ 13.11 $ 26.20 $ 21.54
--------- --------- --------- --------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1)(2)............... 0.03 0.14 0.01 0.10 0.11 0.18
Net Realized and Unrealized Gain/(Loss) on
Investments............................... (0.36) 3.86 (0.53) 13.38 (4.15) 1.11
--------- --------- --------- --------- --------- ---------
Total from Investment Operations........... (0.33) 4.00 (0.52) 13.48 (4.04) 1.29
--------- --------- --------- --------- --------- ---------
DISTRIBUTIONS
Net Investment Income...................... -- (0.04) -- (0.01) (0.09) (0.34)
In Excess of Net Investment Income......... -- -- -- (0.13) -- (0.00)+
Net Realized Gain.......................... -- -- -- (0.12) (0.53) (3.01)
In Excess of Net Realized Gain............. -- -- -- (0.13) -- --
--------- --------- --------- --------- --------- ---------
Total Distributions.......................... -- (0.04) -- (0.39) (0.62) (3.35)
--------- --------- --------- --------- --------- ---------
NET ASSET VALUE, END OF PERIOD............... $ 9.67 $ 13.63 $ 13.11 $ 26.20 $ 21.54 $ 19.48
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
TOTAL RETURN................................. (3.30)% 41.50% (3.82)% 105.71% (15.81)% 6.87%
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)........ $10,719 $41,017 $41,978 $287,136 $276,906 $314,884
Ratio of Expenses to Average Net Assets
(1)(2)...................................... 1.00%** 1.00% 1.00%** 1.00% 1.00% 1.00%
Ratio of Net Investment Income to Average Net
Assets (1)(2)............................... 1.13%** 1.53% 0.61%** 0.83% 0.52% 0.97%
Portfolio Turnover Rate...................... 2% 33% 10% 18% 47% 42%
</TABLE>
- ------------------------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income..................... $ 0.02 $ 0.06 $ 0.02 $ 0.05 $ 0.04 $ 0.03
Ratios before expense limitation:
Expenses to Average Net Assets........... 2.52%** 1.63% 2.02%** 1.38% 1.20% 1.18%
Net Investment Income/(Loss)
to Average Net Assets................. (0.39)%** 0.90% (0.41)%** 0.45% 0.32% 0.79%
</TABLE>
(2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled
to receive a management fee calculated at an annual rate of 0.80% of the
average daily net assets of the Asian Equity Portfolio. The Adviser has
agreed to waive a portion of this fee and/or reimburse expenses of the
Portfolio to the extent that the total operating expenses of the Portfolio
exceed 1.00% of the average daily net assets of the Class A shares and 1.25%
of the average daily net assets of the Class B shares. In the fiscal period
ended October 31, 1991, the year ended October 31, 1992, the two months
ended December 31, 1992, and the years ended December 31, 1993, 1994 and
1995, the Adviser waived management fees and/or reimbursed expenses totaling
$44,000, $167,000, $70,000, $477,000, $535,000 and $522,000, respectively,
for the Asian Equity Portfolio.
* Commencement of Operations.
** Annualized.
+ Amount is less than $0.01 per share.
10
<PAGE>
EUROPEAN EQUITY PORTFOLIO
<TABLE>
<CAPTION>
APRIL 2,
1993* TO YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1994 1995
------------- ------------- -------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD......... $ 10.00 $ 12.91 $ 13.94
------------- ------------- -------------
------------- ------------- -------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1)(2)............... 0.08 0.08 0.14
Net Realized and Unrealized Gain on
Investments............................... 2.83 1.29 1.37
------------- ------------- -------------
Total from Investment Operations........... 2.91 1.37 1.51
------------- ------------- -------------
DISTRIBUTIONS
Net Investment Income...................... -- (0.09) (0.15)
Net Realized Gain.......................... -- (0.25) (1.38)
------------- ------------- -------------
Total Distributions.......................... -- (0.34) (1.53)
------------- ------------- -------------
NET ASSET VALUE, END OF PERIOD............... $ 12.91 $ 13.94 $ 13.92
------------- ------------- -------------
------------- ------------- -------------
TOTAL RETURN................................. 29.10% 10.88% 11.85%
------------- ------------- -------------
------------- ------------- -------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)........ $ 12,681 $ 27,634 $ 69,583
Ratio of Expenses to Average Net Assets
(1)(2)...................................... 1.00%** 1.00% 1.00%
Ratio of Net Investment Income to Average Net
Assets (1)(2)............................... 1.23%** 0.87% 1.37%
Portfolio Turnover Rate...................... 15% 79% 13%
</TABLE>
- ------------------------------
<TABLE>
<S> <C> <C> <C> <C>
(1) Effect of voluntary expense limitation during the
period:
Per share benefit to net investment
income.................................. $ 0.09 $ 0.06 $ 0.03
Ratios before expense limitation:
Expenses to Average Net Assets........... 2.43%** 1.62% 1.25%
Net Investment Income/(Loss) to Average
Net Assets.............................. (0.21)%** 0.25% 1.12%
</TABLE>
(2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled
to receive a management fee calculated at an annual rate of 0.80% of the
average daily net assets of the European Equity Portfolio. The Adviser has
agreed to waive a portion of this fee and/or reimburse expenses of the
Portfolio to the extent that the total operating expenses of the Portfolio
exceed 1.00% of the average daily net assets of the Class A shares and 1.25%
of the average daily net assets of the Class B shares. In the fiscal period
ended December 31, 1993, 1994 and 1995, the Adviser waived management fees
and/or reimbursed expenses totaling $88,000, $112,000 and $130,000,
respectively, for the European Equity Portfolio.
* Commencement of Operations.
** Annualized.
11
<PAGE>
JAPANESE EQUITY PORTFOLIO
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 25,
1994* TO YEAR ENDED
DECEMBER 31, DECEMBER 31,
1994 1995
------------- -------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD......... $ 10.00 $ 9.83
------------- -------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (1)........... (0.01) 0.04
Net Realized and Unrealized Loss on
Investments+.............................. (0.16) (0.40)
------------- -------------
Total from Investment Operations........... (0.17) (0.36)
------------- -------------
DISTRIBUTIONS
In Excess of Net Investment Income......... -- (0.20)
------------- -------------
NET ASSET VALUE, END OF PERIOD............... $ 9.83 $ 9.27
------------- -------------
------------- -------------
TOTAL RETURN................................. (1.70)% (3.64)%
------------- -------------
------------- -------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)........ $ 50,332 $ 119,278
Ratio of Expenses to Average Net Assets
(1)(2)...................................... 1.00%** 1.00%
Ratio of Net Investment Income (Loss) to
Average Net Assets (1)(2)................... (0.10)%** 0.15%
Portfolio Turnover Rate...................... 1% 52%
</TABLE>
- ------------------------
<TABLE>
<S> <C> <C> <C>
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net investment
income.................................. $ 0.02 $ 0.06
Ratios before expense limitation:
Expenses to Average Net Assets........... 1.27%** 1.20%
Net Investment Loss to Average Net
Assets.................................. (0.37)%** (0.05)%
</TABLE>
(2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled
to receive a management fee calculated at an annual rate of 0.80% of the
average daily net assets of the Japanese Equity Portfolio. The Adviser has
agreed to waive a portion of this fee and/or reimburse expenses of the
Portfolio to the extent that the total operating expenses of the Portfolio
exceed 1.00% of the average daily net assets of the Class A shares and 1.25%
of the average daily net assets of the Class B shares. In the fiscal period
ended December 31, 1994 and 1995, the Adviser waived management fees and/or
reimbursed expenses totaling $80,000 and $118,000, respectively, for the
Japanese Equity Portfolio.
* Commencement of Operations.
** Annualized.
+ The amount shown for the year ended December 31, 1995 for a share outstanding
throughout the year does not accord with aggregate net gains on investments
for the year because of the timing of sales and repurchases of the Portfolio
shares in relation to fluctuating market value of the investments in the
Portfolio.
12
<PAGE>
LATIN AMERICAN PORTFOLIO
<TABLE>
<CAPTION>
PERIOD FROM JANUARY
18, 1995* TO
DECEMBER 31, 1995
-------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD......... $ 10.00
-------
-------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1).................. 0.05
Net Realized and Unrealized Loss on
Investments............................... (0.92)
-------
Total from Investment Operations........... (0.87)
-------
DISTRIBUTIONS
Net Investment Income...................... (0.04)
Return of Capital.......................... (0.03)
-------
Total Distributions.......................... (0.07)
-------
NET ASSET VALUE, END OF PERIOD............... $ 9.06
-------
-------
TOTAL RETURN................................. (8.68)%
-------
-------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)........ $ 15,376
Ratio of Expenses to Average Net Assets
(1)(2)...................................... 1.70%**
Ratio of Net Investment Income to Average Net
Assets (1)(2)............................... 0.62%**
Portfolio Turnover Rate...................... 137%
</TABLE>
- ------------------------
<TABLE>
<S> <C> <C>
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net investment
income.................................. $ 0.09
Ratios before expense limitation:
Expenses to Average Net Assets........... 3.13%**
Net Investment Loss to Average Net
Assets.................................. (0.48)%**
</TABLE>
(2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled
to receive a management fee calculated at an annual rate of 1.10% of the
average daily net assets of the Latin American Portfolio. The Adviser has
agreed to waive a portion of this fee and/or reimburse expenses of the
Portfolio to the extent that the total operating expenses of the Portfolio
exceed 1.70% of the average daily net assets of the Class A shares and 1.95%
of the average daily net assets of the Class B shares. In the fiscal period
ended December 31, 1995, the Adviser waived management fees and/or
reimbursed expenses totalling $146,000 for the Portfolio.
* Commencement of Operations.
** Annualized.
13
<PAGE>
PROSPECTUS SUMMARY
THE FUND
The Fund consists of twenty-eight portfolios, offering institutional
investors and high net worth individual investors a broad range of investment
choices coupled with the advantages of a no-load mutual fund with Morgan Stanley
and its affiliates providing customized services as Adviser, Administrator and
Distributor. Each portfolio offers Class A shares and, except for the
International Small Cap, Money Market and Municipal Money Market Portfolios,
also offers Class B shares. Each portfolio has its own investment objective and
policies designed to meet its specific goals. The investment objective of each
Portfolio described in this Prospectus is as follows:
-The GLOBAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of issuers throughout the world,
including U.S. issuers.
-The INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers.
-The INTERNATIONAL SMALL CAP PORTFOLIO seeks long-term capital appreciation
by investing primarily in equity securities of non-U.S. issuers with equity
market capitalizations of less than $1 billion.
-The ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Asian issuers.
-The EUROPEAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of European issuers.
-The JAPANESE EQUITY PORTFOLIO seeks long term capital appreciation by
investing primarily in equity securities of Japanese issuers.
-The LATIN AMERICAN PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Latin American issuers and debt
securities issued or guaranteed by Latin American governments or
governmental entities.
The other portfolios of the Fund are described in other Prospectuses which
may be obtained from the Fund at the address and phone number noted on the cover
page of this Prospectus. The objectives of these other portfolios are listed
below:
GLOBAL AND INTERNATIONAL EQUITY:
-The ACTIVE COUNTRY ALLOCATION PORTFOLIO seeks long-term capital
appreciation by investing in accordance with country weightings determined
by the Adviser in equity securities of non-U.S. issuers which, in the
aggregate, replicate broad country indices.
-The CHINA GROWTH PORTFOLIO seeks to provide long-term capital appreciation
by investing primarily in equity securities of issuers in The People's
Republic of China, Hong Kong and Taiwan.
-The EMERGING MARKETS PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of emerging country issuers.
-The INTERNATIONAL MAGNUM PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers in accordance
with EAFE country (as defined in "Investment Objective and Policies" below)
weightings determined by the Adviser.
14
<PAGE>
-The GOLD PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of foreign and domestic issuers engaged in
gold-related activities.
U.S. EQUITY:
-The AGGRESSIVE EQUITY PORTFOLIO seeks capital appreciation by investing
primarily in corporate equity and equity-linked securities.
-The EMERGING GROWTH PORTFOLIO seeks long-term capital appreciation by
investing primarily in growth-oriented equity securities of small- to
medium-sized corporations.
-The EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation by
investing in growth-oriented equity securities of large capitalization
companies.
-The MICROCAP PORTFOLIO seeks long-term capital appreciation by investing
primarily in growth-oriented equity securities of small corporations.
-The SMALL CAP VALUE EQUITY PORTFOLIO seeks high long-term total return by
investing in undervalued equity securities of small- to medium-sized
companies.
-The U.S. REAL ESTATE PORTFOLIO seeks to provide above average current
income and long-term capital appreciation by investing primarily in equity
securities of companies in the U.S. real estate industry, including real
estate investment trusts.
-The VALUE EQUITY PORTFOLIO seeks high total return by investing in equity
securities which the Adviser believes to be undervalued relative to the
stock market in general at the time of purchase.
EQUITY AND FIXED INCOME:
-The BALANCED PORTFOLIO seeks high total return while preserving capital by
investing in a combination of undervalued equity securities and fixed
income securities.
FIXED INCOME:
-The EMERGING MARKETS DEBT PORTFOLIO seeks high total return by investing
primarily in debt securities of government, government-related and
corporate issuers located in emerging countries.
-The FIXED INCOME PORTFOLIO seeks to produce a high total return consistent
with the preservation of capital by investing in a diversified portfolio of
fixed income securities.
-The GLOBAL FIXED INCOME PORTFOLIO seeks to produce an attractive real rate
of return while preserving capital by investing in fixed income securities
of issuers throughout the world, including U.S. issuers.
-The HIGH YIELD PORTFOLIO seeks to maximize total return by investing in a
diversified portfolio of high yield fixed income securities that offer a
yield above that generally available on debt securities in the three
highest rating categories of the recognized rating services.
-The MORTGAGE-BACKED SECURITIES PORTFOLIO seeks to produce as high a level
of current income as is consistent with the preservation of capital by
investing primarily in a variety of investment grade mortgage-backed
securities.
-The MUNICIPAL BOND PORTFOLIO seeks to produce a high level of current
income consistent with preservation of principal through investment
primarily in municipal obligations, the interest on which is exempt from
federal income tax.
15
<PAGE>
MONEY MARKET:
-The MONEY MARKET PORTFOLIO seeks to maximize current income and preserve
capital while maintaining high levels of liquidity through investing in
high quality money market instruments with remaining maturities of one year
or less.
-The MUNICIPAL MONEY MARKET PORTFOLIO seeks to maximize current tax-exempt
income and preserve capital while maintaining high levels of liquidity
through investing in high quality money market instruments with remaining
maturities of one year or less which are exempt from federal income tax.
INVESTMENT MANAGEMENT
Morgan Stanley Asset Management Inc., a wholly owned subsidiary of Morgan
Stanley Group Inc., which, together with its affiliated asset management
companies, at December 31, 1995 had approximately $57.4 billion in assets under
management as an investment manager or as a fiduciary adviser, acts as
investment adviser to the Fund and each of its portfolios. See "Management of
the Fund -- Investment Adviser" and "Management of the Fund -- Administrator."
HOW TO INVEST
Class A shares of each Portfolio are offered directly to investors at net
asset value with no sales commission or 12b-1 charges. Class B shares, offered
only by the Multiclass Portfolios, are offered at net asset value with no sales
commission, but with a 12b-1 fee, which is accrued daily and paid quarterly,
equal to 0.25% of the Class B shares' average daily net assets on an annualized
basis. Share purchases may be made by sending investments directly to the Fund
or through the Distributor. Shares in a Portfolio account opened prior to
January 2, 1996 were designated Class A shares on January 2, 1996. For a
Multiclass Portfolio account opened on or after January 2, 1996 (a "New
Multiclass Account"), the minimum initial investment is $500,000 for Class A
shares of each Multiclass Portfolio and $100,000 for Class B shares of each
Multiclass Portfolio. The International Equity Portfolio is currently closed to
new investors with the exception of certain Morgan Stanley customers. The
minimum initial investment for Class A shares of the International Small Cap
Portfolio is $500,000. Certain exceptions to the foregoing minimums apply to (1)
shares in a Multiclass Portfolio account opened prior to January 2, 1996 (each,
a "Pre-1996 Multiclass Account") with a value of $100,000 or more on March 1,
1996 (a "Grandfathered Class A Account"); (2) Portfolio accounts held by
officers of the Adviser and its affiliates; and (3) certain advisory or asset
allocation accounts, such as Total Funds Management accounts, managed by Morgan
Stanley or its affiliates, including the Adviser ("Managed Accounts"). The
Adviser reserves the right in its sole discretion to determine which of such
advisory or asset allocation accounts shall be Managed Accounts. For information
regarding Managed Accounts, please contact your Morgan Stanley account
representative or the Fund at the telephone number provided on the cover of this
Prospectus. Shares in a Pre-1996 Multiclass Account with a value of less than
$100,000 on March 1, 1996 (a "Grandfathered Class B Account") converted to Class
B shares on March 1, 1996. The minimum investment levels may be waived at the
discretion of the Adviser for (i) certain employees and customers of Morgan
Stanley or its affiliates and certain trust departments, brokers, dealers,
agents, financial planners, financial services firms, or investment advisers
that have entered into an agreement with Morgan Stanley or its affiliates; and
(ii) retirement and deferred compensation plans and trusts used to fund such
plans, including, but not limited to, those defined in Section 401(a), 403(b) or
457 of the Internal Revenue Code of 1986, as amended, and "rabbi trusts." See
"Purchase of Shares -- Minimum Investment and Account Sizes; Conversion from
Class A to Class B Shares."
16
<PAGE>
The minimum subsequent investment for each Portfolio account is $1,000
(except for automatic reinvestment of dividends and capital gains distributions
for which there is no minimum). Such subsequent investments will be applied to
purchase additional shares in the same class held by a shareholder in a
Portfolio account. See "Purchase of Shares -- Additional Investments."
HOW TO REDEEM
Class A shares of each Portfolio or Class B shares of each Multiclass
Portfolio may be redeemed at any time, without cost, at the net asset value per
share of shares of the applicable class next determined after receipt of the
redemption request. The redemption price may be more or less than the purchase
price. Certain redemptions may cause involuntary redemption or automatic
conversion. Class A or Class B shares held in New Multiclass Accounts are
subject to involuntary redemption if shareholder redemption(s) of such shares
reduces the value of such account to less than $100,000 for a continuous 60-day
period. Involuntary redemption does not apply to Managed Accounts, Grandfathered
Class A Accounts and Grandfathered Class B Accounts, regardless of the value of
such accounts. Class A shares in a New Multiclass Account will convert to Class
B shares if shareholder redemption(s) of such shares reduces the value of such
account to less than $500,000 for a continuous 60-day period. Class B shares in
a New Multiclass Account will convert to Class A shares if shareholder purchases
of additional Class B shares or market activity cause the value of the Class B
shares in the New Multiclass Account to increase to $500,000 or more. If a
shareholder reduces its total investment in Class A shares of the International
Small Cap Portfolio to less than $500,000, the investment may be subject to
redemption. See "Purchase of Shares -- Minimum Account Sizes and Involuntary
Redemption of Shares" and "Redemption of Shares."
RISK FACTORS
The investment policies of each of the Portfolios entail certain risks and
considerations of which an investor should be aware. Each Portfolio will invest
in securities of foreign issuers, which are subject to certain risks not
typically associated with domestic securities. The Latin American Portfolio
invests in securities of issuers located in developing countries and emerging
markets. These securities may impose greater liquidity risks and other risks not
typically associated with investing in more established markets. The Latin
American Portfolio may invest up to 20% of its total assets in lower rated debt
securities ("junk bonds"), including sovereign debt, which securities are
considered speculative with regard to the payment of interest and return of
principal. See "Investment Objectives and Policies" and "Additional Investment
Information." In addition, each Portfolio may invest in repurchase agreements,
lend its portfolio securities, purchase securities on a when-issued basis or
delayed delivery basis and invest in forward foreign currency exchange
contracts, and the Latin American Portfolio may invest in foreign currency
exchange options to hedge currency risk associated with investment in non-U.S.
dollar denominated securities. Each Portfolio may invest in short-term or
medium-term debt securities or hold cash or cash equivalents for temporary
defensive purposes. The International Small Cap Portfolio may invest in
securities that are neither listed on a stock exchange nor traded
over-the-counter, including private placement securities. The Global Equity,
Japanese Equity, Latin American and Asian Equity Portfolios may also invest
indirectly in securities through sponsored or unsponsored American Depositary
Receipts. Each of these investment strategies involves specific risks which are
described under "Investment Objectives and Policies" and "Additional Investment
Information" herein and under "Investment Objectives and Policies" in the
Statement of Additional Information.
17
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of each Portfolio is described below, together with
the policies the Fund employs in its efforts to achieve these objectives. Each
Portfolio's investment objective is a fundamental policy which may not be
changed without the approval of a majority of the Portfolio's outstanding voting
securities. There is no assurance that the Fund will attain its objectives. The
investment policies described below are not fundamental policies and may be
changed without shareholder approval.
THE GLOBAL EQUITY PORTFOLIO
The Global Equity Portfolio seeks long-term capital appreciation by
investing primarily in equity securities of issuers throughout the world,
including U.S. issuers. With respect to the Portfolio, equity securities include
common and preferred stocks, convertible securities, and rights and warrants to
purchase common stocks. The Adviser expects that, under normal circumstances, at
least 20% of the Portfolio's total assets will be invested in the common stocks
of U.S. issuers. The remainder of the Portfolio will be invested in issuers
located throughout the world, including those located in emerging markets. At
least 65% of the total assets of the Portfolio will be invested in equity
securities under normal circumstances. Securities in emerging markets may not be
as liquid as those in developed markets and pose greater risks. Although the
Portfolio intends to invest primarily in securities listed on stock exchanges,
it will also invest in securities traded in over-the-counter markets. The
Adviser's orientation to individual stock selection and value driven approach in
selecting investments for the Portfolio are the same as those described for the
International Equity Portfolio discussed below. The Portfolio may invest in
American, Global or other types of Depositary Receipts.
Although the Portfolio will not invest for short-term trading purposes,
investment securities may be sold from time to time without regard to the length
of time they have been held. It is anticipated that the annual turnover rate of
the Portfolio will not exceed 100% under normal circumstances.
Any remaining assets of the Portfolio not invested as described above may be
invested in certain securities or obligations as set forth in "Additional
Investment Information" below.
THE INTERNATIONAL EQUITY PORTFOLIO
The investment objective of the International Equity Portfolio is to provide
long-term capital appreciation. The production of any current income is
incidental to this objective. The Portfolio seeks to achieve its objective by
investing primarily in equity securities of non-U.S. issuers. With respect to
the Portfolio, equity securities include common and preferred stocks,
convertible securities, and rights and warrants to purchase common stocks. At
least 65% of the total assets of the Portfolio will be invested in such equity
securities under normal circumstances.
The Adviser's approach in selecting investments for the Portfolio is
oriented to individual stock selection, and is value driven. In selecting stocks
for the Portfolio, the Adviser initially identifies those stocks which it
believes to be undervalued in relation to the issuer's assets, cash flow,
earnings and revenues, and then evaluates the future value of such stocks by
running the results of an in-depth study of the issuer through a dividend
discount model. The Adviser utilizes the research of a number of sources,
including its affiliate in Geneva, Switzerland, Morgan Stanley Capital
International, in identifying attractive securities, and applies a number of
18
<PAGE>
proprietary screening criteria to identify those securities it believes to be
undervalued. Portfolio holdings are regularly reviewed and subjected to
fundamental analysis to determine whether they continue to conform to the
Adviser's value criteria. Securities which no longer conform to such value
criteria are sold.
While the Portfolio is not subject to any specific geographic
diversification requirements, it currently intends to diversify investments
among countries to reduce currency risk. Investments will be made primarily in
equity securities of companies domiciled in developed countries, but may also be
made in equity securities of companies domiciled in developing countries as
well. Although the Portfolio intends to invest primarily in equity securities
listed on stock exchanges, it will also invest in equity securities traded in
over-the-counter markets. Securities of companies in developing countries may
pose liquidity risks. The Portfolio will not, under normal circumstances, invest
in equity securities of U.S. issuers. For a description of special
considerations and certain risks associated with investments in foreign issuers,
see "Additional Investment Information." The Portfolio may temporarily reduce
its equity holdings for defensive purposes in response to adverse market
conditions and invest in domestic, Eurodollar and foreign short-term money
market instruments. See "Investment Objectives and Policies" in the Statement of
Additional Information.
Although the Portfolio will not invest for short-term trading purposes,
investment securities may be sold from time to time without regard to the length
of time they have been held. It is anticipated that the annual turnover rate of
the Portfolio will not exceed 100% under normal circumstances.
Any remaining assets of the Portfolio not invested as described above may be
invested in certain securities or obligations as set forth in "Additional
Investment Information" below.
THE INTERNATIONAL SMALL CAP PORTFOLIO
The investment objective of the International Small Cap Portfolio is to
provide long-term capital appreciation. The production of any current income is
incidental to this objective. The Portfolio seeks to achieve its objective by
investing primarily in equity securities of non-U.S. issuers with equity market
capitalizations of less than $1 billion. With respect to the Portfolio, equity
securities include common and preferred stocks, convertible securities, and
rights and warrants to purchase common stocks. At least 65% of the total assets
of the Portfolio will be invested in such equity securities under normal
circumstances. The Portfolio will invest a minimum of 80% of its total assets in
companies with market capitalizations of less than $500 million and may invest
up to an additional 20% of its total assets in companies with total market
capitalizations up to a maximum of $1 billion, for which the actual market float
as represented by the value of the securities that may be freely traded falls
below $500 million. The Adviser's orientation to individual stock selection and
value driven approach in selecting investments for the Portfolio are the same as
those described for the International Equity Portfolio discussed above.
While the Portfolio is not subject to any specific geographic
diversification requirements, it currently intends to diversify investments
among countries to reduce currency risk. Investments will be made primarily in
equity securities of companies domiciled in developed countries, but limited
investments may also be made in the securities of companies domiciled in
developing countries as well, and will not normally exceed 5% of the total
assets of the Portfolio. Although the Portfolio intends to invest primarily in
equity securities listed on stock exchanges, it may also invest in equity
securities traded in over-the-counter markets. Small capitalization securities
involve greater issuer risk and the markets for such securities may be more
volatile and less liquid. Securities of companies in developing countries may
pose liquidity risks. The Portfolio will not, under normal
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circumstances, invest in equity securities of U.S. issuers. For a description of
special considerations and certain risks associated with investments in foreign
issuers, see "Additional Investment Information." The Portfolio may temporarily
reduce its equity holdings for defensive purposes in response to adverse market
conditions and invest in domestic, Eurodollar and foreign short-term money
market instruments. See "Investment Objectives and Policies" in the Statement of
Additional Information.
Although the Portfolio will not invest for short-term trading purposes,
investment securities may be sold from time to time without regard to the length
of time they have been held. It is anticipated that the annual turnover rate of
the Portfolio will not exceed 100% under normal circumstances.
Any remaining assets of the Portfolio not invested as described above may be
invested in certain securities or obligations as set forth in "Additional
Investment Information" below.
THE ASIAN EQUITY PORTFOLIO
The investment objective of the Asian Equity Portfolio is to provide
long-term capital appreciation. The production of any current income is
incidental to this objective. The Portfolio seeks to achieve its objective by
investing primarily in equity securities which are traded on recognized stock
exchanges of the countries in Asia described below and in equity securities of
companies organized under the laws of an Asian country whose business is
conducted principally in Asia. The Portfolio does not intend to invest in equity
securities which are principally traded in markets in Japan or in companies
organized under the laws of Japan. The Portfolio may also invest in American
Depositary Receipts of Asian issuers that are traded on stock exchanges in the
U.S.
The Asian countries to be represented in the Portfolio, which include the
following countries, have the more established markets in the region: Hong Kong,
Singapore, Malaysia, Thailand, the Philippines and Indonesia. The Portfolio may
also invest in common stocks traded on markets in Taiwan, South Korea, India,
Pakistan, Sri Lanka and other developing markets that are open to foreign
investment. There is no requirement that the Fund, at any given time, invest in
any or all of the countries listed above or in any other Asian countries. The
Fund has no set policy for allocating investments among the various Asian
countries. Allocation of investments will depend on the relative attractiveness
of the stocks of issuers in the respective countries. Government regulation and
restrictions in many of the countries of interest may limit the amount, mode and
extent of investment in companies of such countries.
At least 65% of the total assets of the Portfolio will be invested in common
stocks of Asian countries under normal circumstances. The remaining portion of
the Fund will be kept in any combination of debt instruments, bills and bonds of
governmental entities in Asia and the U.S., in notes, debentures, and bonds of
companies in Asia and in money market instruments of the U.S. With respect to
the Portfolio, equity securities include common and preferred stocks,
convertible securities, and rights and warrants to purchase common stocks.
The Adviser's orientation to individual stock selection and value driven
approach in selecting investments for the Portfolio are similar to those
described for the International Equity Portfolio discussed above. The Adviser
will analyze assets, revenues and earnings of an issuer. In selecting industries
and particular issuers, the Adviser will evaluate costs of labor and raw
materials, access to technology, export of products and government regulation.
Although the Portfolio seeks to invest in larger companies, it may invest in
medium and small companies that, in the Adviser's view, have potential for
growth.
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The Portfolio's investments will include securities of issuers located in
developing countries and traded in emerging markets. These securities pose
greater liquidity risks and other risks than securities of companies located in
developed countries and traded in more established markets. For a description of
special considerations and certain risks associated with investment in foreign
issuers, see "Additional Investment Information -- Foreign Investment." See also
"Investment Objectives and Policies" in the Statement of Additional Information.
Although the Portfolio intends to invest primarily in equity securities
listed on stock exchanges, it will also invest in equity securities traded in
over-the-counter markets. Securities traded in over-the-counter markets pose
liquidity risks. The Portfolio may also invest in initial public offerings in
the form of oversubscriptions or private placements. Such investments generally
entail short-term liquidity risks.
Although the Portfolio will not invest for short-term trading purposes,
investment securities may be sold from time to time without regard to the length
of time they have been held. It is anticipated that the annual turnover rate of
the Portfolio will not exceed 100% under normal circumstances.
Pending investment or settlement, and for liquidity purposes, the Portfolio
may invest in domestic, Eurodollar and foreign short-term money market
instruments. The Portfolio may also purchase such instruments to temporarily
reduce its equity holdings for defensive purposes in response to adverse market
conditions.
Because of the lack of hedging facilities in the currency markets of Asia,
no active currency hedging strategy is anticipated currently. Instead, each
investment will be considered on a total currency adjusted basis with the U.S.
dollar as a base currency. The Portfolio may engage in currency exchange
contracts. See "Statement of Additional Information -- Forward Foreign Currency
Exchange Contracts" in this Prospectus.
Any remaining assets of the Portfolio not invested as described above may be
invested in certain securities or obligations as set forth in "Additional
Investment Information" below.
THE EUROPEAN EQUITY PORTFOLIO
The investment objective of the European Equity Portfolio is to provide
long-term capital appreciation. The Portfolio seeks to achieve this objective by
investing primarily in equity securities of European issuers, including those
located in Germany, France, Switzerland, Belgium, Italy, Finland, Sweden,
Denmark, Norway and the United Kingdom. Investments may also be made in equity
securities of issuers located in the smaller and emerging markets of Europe.
With respect to the Portfolio, equity securities include common and preferred
stocks, convertible securities, and rights and warrants to purchase common
stocks. At least 65% of the total assets of the Portfolio will be invested in
equity securities of European issuers under normal circumstances. The Adviser's
orientation to individual stock selection and value-driven approach in selecting
investments for the Portfolio are the same as those described for the
International Equity Portfolio discussed above. Securities in emerging markets
may not be as liquid as those in developed markets and pose greater risks.
Although the Portfolio intends to invest primarily in equity securities listed
on stock exchanges, it will also invest in equity securities traded in
over-the-counter markets.
While the Portfolio is not subject to any specific geographic
diversification requirements, it currently intends to diversify investments
among countries to reduce currency risk. Investments may be made primarily in
equity securities of companies domiciled in developed countries, but may also be
made in equity securities of companies domiciled in developing countries as
well. Although the Portfolio intends to invest primarily in
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equity securities listed on stock exchanges, it will also invest in securities
traded in over-the-counter markets. Securities of companies in developing
countries may pose liquidity risks. The Portfolio will not, under normal
circumstances, invest in equity securities of U.S. issuers. For a description of
special considerations and certain risks associated with investments in foreign
issuers, see "Additional Investment Information." The Portfolio may temporarily
reduce its equity holdings for defensive purposes in response to adverse market
conditions and invest in domestic, Eurodollar and foreign short-term money
market instruments. See "Investment Objectives and Policies" in the Statement of
Additional Information.
Although the Portfolio will not invest for short-term trading purposes,
investment securities may be sold from time to time without regard to the length
of time they have been held. It is anticipated that the annual turnover rate of
the Portfolio will not exceed 100% under normal circumstances.
Any remaining assets of the Portfolio not invested as described above may be
invested in certain securities or obligations as set forth in "Additional
Investment Information" below.
THE JAPANESE EQUITY PORTFOLIO
The investment objective of the Japanese Equity Portfolio is to provide
long-term capital appreciation. The Portfolio seeks to achieve this objective by
investing primarily in equity securities of Japanese issuers. With respect to
the Portfolio, equity securities include common and preferred stocks,
convertible securities, and rights and warrants to purchase common stocks.
Under normal conditions, the Portfolio will invest at least 80% of its total
assets in securities issued by entities that are organized under the laws of
Japan, affiliates of Japanese companies (wherever organized or traded), and
issuers not organized under the laws of Japan but deriving 50% or more of their
revenues from Japan. These securities may include debt securities (issued by the
Japanese government or by Japanese companies) when the Adviser believes that the
potential for capital appreciation from investment in debt securities equals or
exceeds that available from investment in equity securities. In making
investment decisions, the Adviser will consider, among other factors, the size
of the company, its financial condition, its marketing and technical strengths
and its competitiveness in its industry. All debt securities in which the
Portfolio may invest will be rated no lower than BBB by Standard & Poor's
Ratings Group ("S&P"), Baa by Moody's Investors Service, Inc. ("Moody's") or BBB
by Mikuni Inc. ("Mikuni") (a Japanese rating agency) or, if unrated, of
comparable quality as determined by the Adviser. Securities rated BBB by S&P,
Baa by Moody's or BBB by Mikuni have speculative characteristics and changes in
economic conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments on such securities than would
be the case with higher rated securities. The convertible securities in which
the Portfolio may invest include bonds, notes, debentures, preferred stocks and
other securities convertible into common stocks and may be fixed-income or zero
coupon debt securities. Prior to their conversion, convertible securities may
have characteristics similar to nonconvertible debt securities.
The Portfolio currently intends to focus its investments in Japanese
companies that have an active market for their shares and that the Adviser
believes show a potential for better than average growth. The Portfolio
anticipates that most equity securities of Japanese companies in which it
invests, either directly or indirectly by means of American Depositary Receipts
or convertible debentures, will be listed on securities exchanges in Japan. The
Portfolio may also invest in equity securities of Japanese companies that are
traded in an over-the-counter market.
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The Portfolio may also invest up to 20% of its total assets in cash or
short-term government or other short-term prime obligations or repurchase
agreements so that funds may be readily available for general corporate
purposes, including the payment of dividends, redemptions and operating
expenses, for investment in securities through exercise of rights or otherwise.
For temporary defensive purposes, the Portfolio may invest some or all of its
assets in cash or such short-term obligations.
Although the Portfolio will not invest for short-term trading purposes,
investment securities may be sold from time to time without regard to the length
of time they have been held. It is anticipated that the annual portfolio
turnover rate of the Portfolio will not exceed 100% under normal circumstances.
Any remaining assets of the Portfolio not invested as described above may be
invested in certain securities or obligations as set forth in "Additional
Investment Information" below.
RISK FACTORS RELATING TO JAPANESE EQUITY PORTFOLIO. Investors should
consider the following factors inherent in investment in Japan.
TRADE ISSUES. Because of the concentration of Japanese exports in highly
visible products such as automobiles, machine tools and semiconductors, and the
large trade surpluses ensuing therefrom, Japan is in a difficult phase in its
relation with its trading partners, particularly the U.S., where the trade
imbalance is the greatest. Retaliatory action taken by such trading partners
could affect the ability of Japanese companies to export goods to these
countries, which could negatively impact the value of securities in the
Portfolio.
CURRENCY FACTORS. Over a long period of years, the yen has generally
appreciated in relation to the dollar. The yen's appreciation would add to the
returns of dollars invested through the Portfolio in Japan. A decline in the
value of the yen would have the opposite effect, adversely affecting the value
of the Portfolio in dollar terms.
THE JAPANESE STOCK MARKET. Like other stock markets, the Japanese stock
market can be volatile. A decline in the market may have an adverse effect on
the availability of credit and on the value of the substantial stock holdings of
Japanese companies in particular, Japanese banks, insurance companies and other
financial institutions. A decline in the market may contribute to weakness in
Japan's economy. The common stocks of many Japanese companies continue to trade
at high price-earnings ratios even after the recent market decline. Differences
in accounting methods make it difficult to compare the earnings of Japanese
companies with those of companies in other countries, especially the U.S. In
general, however, reported net income in Japan is understated relative to U.S.
accounting standards. In addition, Japanese companies have tended historically
to have higher growth rates than U.S. companies, and Japanese interest rates
have generally been lower than in the U.S., both of which factors tend to result
in lower discount rates and higher price-earnings ratios in Japan than in the
U.S.
THE LATIN AMERICAN PORTFOLIO
The investment objective of the Latin American Portfolio is long-term
capital appreciation. The Portfolio seeks to achieve this objective by investing
primarily in equity securities (i) of companies organized in or for which the
principal securities trading market is in Latin America, (ii) denominated in a
Latin American currency issued by companies to finance operations in Latin
America, or (iii) of companies that alone or on a consolidated basis derive 50%
or more of their annual revenues from either goods produced, sales made or
services
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performed in Latin America (collectively, "Latin American issuers") and by
investing, from time to time, in debt securities issued or guaranteed by a Latin
American government or governmental entity ("Sovereign Debt"). Income is not a
consideration in selecting investments or an investment objective.
Under normal conditions, substantially all, but not less than 80%, of the
Portfolio's total assets are invested in equity securities of Latin American
issuers and in Sovereign Debt. For purposes of this Prospectus, unless otherwise
indicated, Latin America consists of Argentina, Bolivia, Brazil, Chile,
Colombia, Costa Rica, Cuba, the Dominican Republic, Ecuador, El Salvador,
Guatemala, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, Uruguay and
Venezuela. See "Additional Investment Information -- Foreign Investment Risk
Factors" for a discussion of the nature of information publicly available for
non-U.S. companies. With respect to the Portfolio, equity securities include
common and preferred stocks, convertible securities, rights and warrants to
purchase common stocks, equity interests in trusts or partnerships, and
American, Global or other types of Depositary Receipts. See "Additional
Investment Information -- Depositary Receipts."
The Portfolio focuses its investments in listed equity securities in
Argentina, Brazil, Chile and Mexico, the most developed capital markets in Latin
America. The Portfolio expects, under normal market conditions, to have at least
55% of its total assets invested in listed equity securities of issuers in these
four countries. In addition, the Portfolio actively invests in markets in other
Latin American countries such as Colombia, Peru and Venezuela. The Portfolio is
not limited in the extent to which it may invest in any Latin American country
and intends to invest opportunistically as markets develop. The portion of the
Portfolio's holdings in any Latin American country will vary from time to time,
although the portion of the Portfolio's assets invested in Chile may tend to
vary less than the portions invested in other Latin American countries because,
with limited exceptions, capital invested in Chile currently cannot be
repatriated for one year. See "Additional Investment Information -- Investment
Procedures: Argentina, Brazil, Chile and Mexico" in the Statement of Additional
Information.
The governments of some Latin American countries have been engaged in
programs of selling part or all of their stakes in government owned or
controlled enterprises ("privatizations"). The Adviser believes that
privatizations may offer investors opportunities for significant capital
appreciation and intends to invest assets of the Portfolio in privatizations in
appropriate circumstances. In certain Latin American countries, the ability of
foreign entities, such as the Portfolio, to participate in privatizations may be
limited by local law, or the terms on which the Portfolio may be permitted to
participate may be less advantageous than those for local investors. There can
be no assurance that Latin American governments will continue to sell companies
currently owned or controlled by them or that any privatization programs in
which the Portfolio participates will be successful.
Several Latin American countries have adopted debt conversion programs,
pursuant to which investors may use Sovereign Debt of a country, directly or
indirectly, to make investments in local companies. The terms of the various
programs vary from country to country although each program includes significant
restrictions on the application of the proceeds received in the conversion and
on the remittance of profits on the investment and of the invested capital. The
Portfolio may participate in Latin American debt conversion programs. The
Adviser will evaluate opportunities to enter into debt conversion transactions
as they arise.
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Equity securities in which the Portfolio may invest include those that are
neither listed on a stock exchange nor traded over-the-counter. As a result of
the absence of a public trading market for these securities, they may be less
liquid than publicly traded securities. See "Additional Investment Information
- -- Non-Publicly Traded Securities, Private Placements and Restricted Securities"
below.
To the extent that the Portfolio's assets are not invested in equity
securities of Latin American issuers or in Sovereign Debt, the remainder of the
assets may be invested in (i) debt securities of Latin American issuers, (ii)
equity or debt securities of corporate or governmental issuers located in
countries outside Latin America, and (iii) short-term and medium-term debt
securities of the type described under "Additional Investment Information --
Temporary Investments" below. The Portfolio's assets may be invested in debt
securities when the Portfolio believes that, based upon factors such as relative
interest rate levels and foreign exchange rates, such debt securities offer
opportunities for long-term capital appreciation. It is likely that many of the
debt securities in which the Portfolio will invest will be unrated. The
Portfolio may invest up to 20% of its total assets in securities that are
determined by the Adviser to be comparable to securities rated below investment
grade by S&P or Moody's ("junk bonds"). Such lower-quality securities are
regarded as being predominantly speculative and involve significant risks. See
"Additional Investment Information -- Lower Rated Debt Securities."
The Portfolio's holdings of lower-quality debt securities will consist
predominantly of Sovereign Debt, much of which trades at substantial discounts
from face value and which may include Sovereign Debt comparable to securities
rated as low as D by S&P or C by Moody's. The Portfolio may invest in Sovereign
Debt to hold and trade in appropriate circumstances, as well as to use to
participate in debt for equity conversion programs. The Portfolio will invest in
Sovereign Debt only when the Portfolio believes such investments offer
opportunities for long- term capital appreciation. Investment in Sovereign Debt
involves a high degree of risk and such securities are generally considered to
be speculative in nature. See "Additional Investment Information -- Sovereign
Debt."
For temporary defensive purposes, the Portfolio may invest less than 80% of
its total assets in Latin American equity securities and Sovereign Debt, in
which case the Portfolio may invest in other equity or debt securities or may
invest in certain short-term (less than twelve months to maturity) and
medium-term (not greater than five years to maturity) debt securities or hold
cash. See "Additional Investment Information -- Temporary Investments."
The Portfolio may enter into forward foreign currency exchange contracts and
foreign currency futures contracts, purchase and write (sell) put and call
options on securities, foreign currency and on foreign currency futures
contracts, and enter into stock index and interest rate futures contracts and
options thereon. See "Additional Investment Information." There currently are
limited options and futures markets for Latin American currencies, securities
and indexes, and the nature of the strategies adopted by the Adviser and the
extent to which those strategies are used depends on the development of those
markets. The Portfolio may also from time to time lend securities (but not in
excess of 20% of its total assets) from its portfolio to brokers, dealers and
financial institutions. See "Additional Investment Information -- Loans of
Portfolio Securities."
The Portfolio will not invest more than 25% of its total assets in one
industry except and to the extent, and only for such period of time as, the
Board of Directors determines in view of the considerations discussed below that
it is appropriate and in the best interest of the Portfolio and its shareholders
to invest more than 25% of the Portfolio's total assets in companies involved in
the telecommunications industry or financial services industry,
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respectively. Since the securities markets of Latin American countries are
emerging markets characterized by a relatively small number of issues, it is
possible that one or more markets may on occasion be dominated by issues of
companies engaged in these two industries. In addition, it is possible that
government privatizations in certain Latin American countries, which currently
represent a primary source of new issues in many Latin American markets and
often represent attractive investment opportunities, will occur in these two
industries. As a result, the Portfolio has adopted a policy under which it may
invest more than 25% of its total assets in securities of issuers in such
industries. The Portfolio would only take this action if the Board of Directors
determines that the Latin American markets are dominated by securities of
issuers in such industries and that, in light of the anticipated return,
investment quality, availability and liquidity of the issues in such industries,
the Portfolio's ability to achieve its investment objective would, in light of
its investment policies and limitations, be materially adversely affected if the
Portfolios were not able to invest greater than 25% of its total assets in such
industries. In the event that the Board of Directors permits greater than 25% of
the Portfolio's total assets to be invested in the telecommunications or
financial services industry, the Portfolio may be exposed to increased
investment risks peculiar to that industry. The Portfolio will notify its
shareholders of any decision by the Board of Directors to permit (or cease)
investments of more than 25% of the Portfolio's total assets in the
telecommunications or financial services industry. Such notice will, to the
extent applicable, include a discussion of any increased investment risks
peculiar to such industry to which the Portfolio may be exposed.
The Portfolio intends to purchase and hold securities for long-term capital
appreciation and does not expect to trade for short-term gain. Accordingly, it
is anticipated that the annual portfolio turnover rate normally will not exceed
50%, although in any particular year, market conditions could result in
portfolio activity at a greater or lesser rate than anticipated. The rate of
portfolio turnover will not be a limiting factor when the Portfolio deems it
appropriate to purchase or sell securities. However, the U.S. federal tax
requirement that the Portfolio derive less than 30% of its gross income from the
sale or disposition of securities held less than three months may limit the
Portfolio's ability to dispose of its securities.
Any remaining assets of the Portfolio not invested as described above may be
invested in certain securities or obligations as set forth in "Additional
Investment Information" below.
ADDITIONAL INVESTMENT INFORMATION
BORROWING AND OTHER FORMS OF LEVERAGE. The Latin American Portfolio is
authorized to borrow money from banks and other entities in an amount equal to
up to 33 1/3% of its total assets (including the amount borrowed) less all
liabilities and indebtedness other than the borrowing, and may use the proceeds
of the borrowing for investment purposes or to pay dividends. Borrowing creates
leverage which is a speculative characteristic. Although the Portfolio is
authorized to borrow, it will do so only when the Adviser believes that
borrowing will benefit the Portfolio after taking into account considerations
such as the costs of borrowing and the likely investment returns on securities
purchased with borrowed monies. Borrowing by the Portfolio will create the
opportunity for increased net income but, at the same time, will involve special
risk considerations. Leveraging resulting from borrowing will magnify declines
as well as increases in the Portfolio's net asset value per share and net yield.
The Portfolio expects that all of its borrowing will be made on a secured
basis. The Portfolio's Custodian will either segregate the assets securing the
borrowing for the benefit of the lenders or arrangements will be made
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with a suitable sub-custodian. If assets used to secure the borrowing decrease
in value, the Portfolio may be required to pledge additional collateral to the
lender in the form of cash or securities to avoid liquidation of those assets.
DEPOSITARY RECEIPTS. The Asian Equity, Global Equity, Latin American and
Japanese Equity Portfolios may invest in American Depositary Receipts ("ADRs")
and the Global Equity and Latin American Portfolios may also invest in other
Depositary Receipts, including Global Depositary Receipts ("GDRs"), European
Depositary Receipts ("EDRs") and other Depositary Receipts (which, together with
ADRs, GDRs and EDRs, are hereinafter collectively referred to as "Depositary
Receipts"), to the extent that such Depositary Receipts become available. ADRs
are securities, typically issued by a U.S. financial institution (a
"depositary"), that evidence ownership interests in a security or a pool of
securities issued by a foreign issuer (the "underlying issuer") and deposited
with the depositary. ADRs include American Depositary Shares and New York Shares
and may be "sponsored" or "unsponsored." Sponsored ADRs are established jointly
by a depositary and the underlying issuer, whereas unsponsored ADRs may be
established by a depositary without participation by the underlying issuer.
GDRs, EDRs and other types of Depositary Receipts are typically issued by
foreign depositaries, although they may also be issued by U.S. depositaries, and
evidence ownership interests in a security or pool of securities issued by
either a foreign or a U.S. corporation. Generally, Depositary Receipts in
registered form are designed for use in the U.S. securities market and
Depositary Receipts in bearer form are designed for use in securities markets
outside the United States. The Portfolio may invest in sponsored and unsponsored
Depositary Receipts. For purposes of the Portfolio's investment policies, the
Portfolio's investments in Depositary Receipts will be deemed to be investments
in the underlying securities.
FOREIGN INVESTMENT. Investment in securities of foreign issuers and in
foreign branches of domestic banks involves somewhat different investment risks
than those affecting securities of U.S. domestic issuers. There may be limited
publicly available information with respect to foreign issuers, and foreign
issuers are not generally subject to uniform accounting, auditing and financial
and other reporting standards and requirements comparable to those applicable to
U.S. companies. There may also be less government supervision and regulation of
foreign securities exchanges, brokers and listed companies than in the U.S. Many
foreign securities markets have substantially less volume than U.S. national
securities exchanges, and securities of some foreign issuers are less liquid and
more volatile than securities of comparable domestic issuers. Brokerage
commissions and other transaction costs on foreign securities exchanges are
generally higher than in the U.S. Dividends and interest paid by foreign issuers
may be subject to withholding and other foreign taxes, which may decrease the
net return on foreign investments as compared to dividends and interest paid to
the Portfolios by U.S. companies, and it is not expected that a Portfolio or its
shareholders would be able to claim a credit for U.S. tax purposes with respect
to any such foreign taxes. See "Taxes." Additional risks include future
political and economic developments, the possibility that a foreign jurisdiction
might impose or change withholding taxes on income payable with respect to
foreign securities, possible seizure, nationalization or expropriation of the
foreign issuer or foreign deposits and the possible adoption of foreign
governmental restrictions such as exchange controls. Many of the emerging or
developing countries may have less stable political environments than more
developed countries. Also, it may be more difficult to obtain a judgment in a
court outside the United States.
Investments in securities of foreign issuers are frequently denominated in
foreign currencies, and the Portfolios may temporarily hold uninvested reserves
in bank deposits in foreign currencies. Therefore, the value
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of each Portfolio's assets as measured in U.S. dollars may be affected favorably
or unfavorably by changes in currency rates and in exchange control regulations,
and the Portfolios may incur costs in connection with conversions between
various currencies.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. Each Portfolio may enter into
forward foreign currency exchange contracts ("forward contracts") that provide
for the purchase of or sale of an amount of a specified currency at a future
date. Purposes for which such contracts may be used include protecting against a
decline in a foreign currency against the U.S. dollar between the trade date and
settlement date when a Portfolio purchases or sells securities, locking in the
U.S. dollar value of dividends declared on securities held by a Portfolio and
generally protecting the U.S. dollar value of securities held by a Portfolio
against exchange rate fluctuations. Such contracts may also be used as a
protective measure against the effects of fluctuating rates of currency exchange
and exchange control regulations. While such forward contracts may limit losses
to a Portfolio as a result of exchange rate fluctuation, they will also limit
any gains that may otherwise have been realized. The Latin American Portfolio
may also enter into foreign currency futures contracts. See "Investment
Objectives and Policies -- Forward Currency Exchange Contracts" in the Statement
of Additional Information. Except in circumstances where segregated accounts are
not required by the 1940 Act and the rules adopted thereunder, the Portfolio's
Custodian will place cash, U.S. government securities, or high-grade debt
securities into a segregated account of a Portfolio in an amount equal to the
value of such Portfolio's total assets committed to the consummation of forward
foreign currency exchange contracts. If the value of the securities placed in
the segregated account declines, additional cash or securities will be placed in
the account on a daily basis so that the value of the account will be at least
equal to the amount of such Portfolio's commitments with respect to such
contracts. See "Investment Objectives and Policies -- Forward Foreign Currency
Exchange Contracts" in the Statement of Additional Information.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. In order to remain
fully invested, and to reduce transaction costs, the Latin American Portfolio
may utilize appropriate securities index futures contracts, options on
securities index futures contracts, appropriate interest rate futures contracts
and options on interest rate futures contracts to a limited extent. Because
transactions costs associated with futures and options may be lower than the
costs of investing in securities directly, it is expected that the use of index
futures and options to facilitate cash flows may reduce a Portfolio's overall
transactions costs. The Portfolio may sell indexed financial futures contracts
in anticipation of or during a market decline to attempt to offset the decrease
in market value of securities in its portfolio that might otherwise result. When
the Portfolio is not fully invested and the Adviser anticipates a significant
market advance, it may purchase stock index futures in order to gain rapid
market exposure that may in part or entirely offset increases in the cost of
securities that it intends to purchase. In a substantial majority of these
transactions, the Portfolio will purchase such securities upon termination of
the futures position but under unusual market conditions, a futures position may
be terminated without the corresponding purchase of securities. The Portfolio
will engage in futures and options transactions only for hedging purposes.
The Portfolio will engage only in transactions in securities index futures
contracts, interest rate futures contracts and options thereon which are traded
on a recognized securities or futures exchange. There currently are limited
securities index futures, interest rate futures and options on such futures
markets in many countries, particularly emerging countries such as Latin
American countries, and the nature of the strategies adopted by the Adviser and
the extent to which those strategies are used will depend on the development of
such markets.
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The Portfolio may enter into futures contracts and options thereon provided
that not more than 5% of the Portfolio's total assets are required as deposit to
secure obligations under such contracts, and provided further that not more than
20% of the Portfolio's total assets, in the aggregate are invested in futures
contracts and options transactions.
The primary risks associated with the use of futures and options are (i)
imperfect correlation between the change in market value of the stocks held by
the Portfolio and the prices of futures and options relating to the stocks
purchased or sold by the Portfolio, and (ii) possible lack of a liquid secondary
market for a futures contract and the resulting inability to close a futures
position which could have an adverse impact on the Portfolio's ability to hedge.
The risk of loss in trading on futures contracts in some strategies can be
substantial, due both to the low margin deposits required and the extremely high
degree of leverage involved in futures pricing. Gains and losses on futures and
options depend on the Adviser's ability to predict correctly the direction of
stock prices, interest rates, and other economic factors. In the opinion of the
Directors, the risk that the Portfolio will be unable to close out a futures
position or options contract will be minimized by only entering into futures
contracts or options transactions for which there appears to be a liquid
secondary market. For more detailed information about futures transactions see
"Investment Objectives and Policies" in the Statement of Additional Information.
INVESTMENT FUNDS. Some emerging countries have laws and regulations that
currently preclude direct foreign investment in the securities of their
companies. However, indirect foreign investment in the securities of companies
listed and traded on the stock exchanges in these countries is permitted by
certain emerging countries through investment funds which have been specifically
authorized. The Latin American Portfolio may invest in these investment funds
subject to the provisions of the Investment Company Act of 1940, as amended (the
"1940 Act"), and other applicable laws as discussed below under "Investment
Restrictions." If the Portfolio invests in such investment funds, the
Portfolio's shareholders will bear not only their proportionate share of the
expenses of the Portfolio (including operating expenses and the fees of the
Adviser), but also will indirectly bear similar expenses of the underlying
investment funds.
Certain of the investment funds referred to in the preceding paragraph are
advised by the Adviser. The Portfolio may, to the extent permitted under the
1940 Act and other applicable law, invest in these investment funds. If the
Portfolio does elect to make an investment in such an investment fund, it will
only purchase the securities of such investment fund in the secondary market.
LOANS OF PORTFOLIO SECURITIES. Each Portfolio may lend its securities to
brokers, dealers, domestic and foreign banks or other financial institutions for
the purpose of increasing its net investment income. These loans must be secured
continuously by cash or equivalent collateral or by a letter of credit at least
equal to the market value of the securities loaned plus accrued interest or
income. There may be risks of delay in recovery of the securities or even loss
of rights in the collateral should the borrower of the securities fail
financially. A Portfolio will not enter into securities loan transactions
exceeding in the aggregate 33 1/3% of the market value of the Portfolio's total
assets (exceeding in the aggregate 20% of such value with respect to the Latin
American Portfolio). For more detailed information about securities lending, see
"Investment Objectives and Policies" in the Statement of Additional Information.
LOWER RATED DEBT SECURITIES. The Latin American Portfolio may invest in
lower rated or unrated debt securities, commonly referred to as "junk bonds." In
addition, the emerging country debt securities in which the
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<PAGE>
Portfolio may invest are subject to risk and will not be required to meet a
minimum rating standard and may not be rated. Fixed income securities are
subject to the risk of an issuer's inability to meet principal and interest
payments on the obligations (credit risk) and may also be subject to price
volatility due to such factors as interest rate sensitivity, market perception
of the creditworthiness of the issuer and general market liquidity (market
risk). Lower rated or unrated securities are more likely to react to
developments affecting market and credit risk than are more highly rated
securities, which react primarily to movements in the general level of interest
rates. The market values of fixed-income securities tend to vary inversely with
the level of interest rates. Yields and market values of lower rated and unrated
debt securities will fluctuate over time, reflecting not only changing interest
rates but the market's perception of credit quality and the outlook for economic
growth. When economic conditions appear to be deteriorating, medium to lower
rated securities may decline in value due to heightened concern over credit
quality, regardless of prevailing interest rates. Fluctuations in the value of
the Portfolio's investments will be reflected in the Portfolio's net asset value
per share. The Adviser considers both credit risk and market risk in making
investment decisions for the Portfolio. Investors should carefully consider the
relative risks of investing in lower rated and unrated debt securities and
understand that such securities are not generally meant for short-term
investing.
The U.S. corporate lower rated and unrated debt securities market is
relatively new and its recent growth paralleled a long period of economic
expansion and an increase in merger, acquisition and leveraged buyout activity.
Adverse economic developments may disrupt the market for U.S. corporate lower
rated and unrated debt securities and for emerging country debt securities. Such
disruptions may severely affect the ability of issuers, especially highly
leveraged issuers, to service their debt obligations or to repay their
obligations upon maturity. In addition, the secondary market for lower rated and
unrated debt securities, which is concentrated in relatively few market makers,
may not be as liquid as the secondary market for more highly rated securities.
As a result, the Adviser could find it more difficult to sell these securities
or may be able to sell the securities only at prices lower than if such
securities were widely traded. In addition there may be limited trading markets
for debt securities of issuers located in emerging countries. Prices realized
upon the sale of such lower rated or unrated securities, under these
circumstances, may be less than the prices used in calculating the Portfolio's
net asset value.
Prices for lower rated and unrated debt securities may be affected by
legislative and regulatory developments. These laws could adversely affect the
Portfolio's net asset value and investment practices, the secondary market for
lower rated and unrated debt securities, the financial condition of issuers of
such securities and the value of outstanding lower rated and unrated debt
securities. For example, U.S. federal legislation requiring the divestiture by
federally insured savings and loan associations of their investments in lower
rated and unrated debt securities and limiting the deductibility of interest by
certain corporate issuers of lower rated and unrated debt securities adversely
affected the market in recent years.
Lower rated or unrated debt obligations also present risks based on payment
expectations. If an issuer calls the obligations for redemption, the Portfolio
may have to replace the security with a lower yielding security, resulting in a
decreased return for investors. If the Portfolio experiences unexpected net
redemptions, it may be forced to sell its higher rated securities, resulting in
a decline in the overall credit quality of the Portfolio's investment portfolio
and increasing the exposure of the Portfolio to the risks of lower rated and
unrated debt securities.
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MONEY MARKET INSTRUMENTS. The Portfolios are permitted to invest in money
market instruments, although each Portfolio intends to stay invested in
securities satisfying their primary investment objective to the extent
practical. Each Portfolio may make money market investments pending other
investment or settlement for liquidity, or in adverse market conditions. The
money market investments permitted for the Portfolios include obligations of the
U.S. Government and its agencies and instrumentalities, obligations of foreign
sovereignties, other debt securities, commercial paper including bank
obligations, certificates of deposit (including Eurodollar certificates of
deposit) and repurchase agreements. For more detailed information about these
money market investments, see "Description of Securities and Ratings" in the
Statement of Additional Information.
NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED
SECURITIES. The International Small Cap Portfolio and the Latin American
Portfolio may invest in securities that are neither listed on a stock exchange
nor traded over-the-counter, including privately placed securities. Such
unlisted equity securities may involve a higher degree of business and financial
risk that can result in substantial losses. As a result of the absence of a
public trading market for these securities, they may be less liquid than
publicly traded securities. Although these securities may be resold in privately
negotiated transactions, the prices realized from these sales could be less than
those originally paid by the Portfolio or less than what may be considered the
fair value of such securities. Further, more companies whose securities are not
publicly traded may not be subject to the disclosure and other investor
protection requirements which might be applicable if their securities were
publicly traded. If such securities are required to be registered under the
securities laws of one or more jurisdictions before being resold, the Portfolio
may be required to bear the expenses of registration. As a general matter, each
Portfolio may not invest more than 15% of its net assets in illiquid securities,
including securities for which there is no readily available secondary market,
nor more than 10% of its total assets in securities that are restricted from
sale to the public without registration ("Restricted Securities") under the
Securities Act of 1933, as amended (the "1933 Act"). Nevertheless, to the extent
it can do so consistent with the foregoing limits, each Portfolio may invest up
to 25% of its total assets in Restricted Securities that can be offered and sold
to qualified institutional buyers under Rule 144A under that Act ("144A
Securities"). The Board of Directors has adopted guidelines and delegated to the
Adviser, subject to the supervision of the Board of Directors, the daily
function of determining and monitoring the liquidity of 144A securities. Rule
144A securities may become illiquid if qualified institutional buyers are not
interested in acquiring the securities. Investors should note that investments
of 5% of a Portfolio's total assets may be considered a speculative activity and
may involve greater risk and expense to the Portfolio.
OPTIONS TRANSACTIONS. The Latin American Portfolio may seek to increase its
return or may hedge all or a portion of its portfolio investments through
options with respect to securities in which the Portfolio may invest. The
Portfolio will engage in transactions in such options which are traded on a
recognized securities or futures exchange and in over-the-counter options where
the option counterparty has a minimum net worth of $20 million. There currently
are limited options markets in emerging countries, including Latin American
countries and the nature of the strategies adopted by the Adviser and the extent
to which those strategies are used will depend on the development of such option
markets.
The Latin American Portfolio may write (i.e., sell) covered call options
which give the purchaser the right to buy the underlying security covered by the
option from the Portfolio at the stated exercise price. A "covered" call option
means that so long as the Portfolio is obligated as the writer of the option, it
will own (i) the
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underlying securities subject to the option, or (ii) securities convertible or
exchangeable without the payment of any consideration into the securities
subject to the option. As a matter of operating policy, the value of the
underlying securities on which options will be written at any one time will not
exceed 5% of the total assets of the Portfolio. In addition, as a matter of
operating policy, the Portfolio will neither purchase or write put options on
securities nor purchase call options on securities (except in connection with
closing purchase transactions).
The Latin American Portfolio will receive a premium from writing call
options, which increases the Portfolio's return on the underlying security in
the event the option expires unexercised or is closed out at a profit. By
writing a call, the Portfolio will limit its opportunity to profit from an
increase in the market value of the underlying security above the exercise price
of the option for as long as the Portfolio's obligation as writer of the option
continues. Thus, in some periods the Portfolio will receive less total return
and in other periods greater total return from writing covered call options than
it would have received from its underlying securities had it not written call
options.
The Latin American Portfolio may also write (i.e., sell) covered put
options. By selling a covered put option, the Portfolio incurs an obligation to
buy the security underlying the option from the purchaser of the put at the
option's exercise price at any time during the option period, at the purchaser's
election (certain options written by the Portfolio will be exercisable by the
purchaser only on a specific date). Generally, a put option is "covered" if the
Portfolio maintains cash, U.S. Government securities or other high grade debt
obligations equal to the exercise price of the option or if the Portfolio holds
a put option on the same underlying security with a similar or higher exercise
price. The Portfolio may sell put options to receive the premiums paid by
purchasers and to close out a long put option position. In addition, when the
Adviser wishes to purchase a security at a price lower than its current market
price, the Portfolio may write a covered put at an exercise price reflecting the
lower purchase price sought.
The Portfolio may also purchase put or call options on individual securities
or baskets of securities. When the Portfolio purchases a call option it acquires
the right to buy a designated security at a designated price (the "exercise
price"), and when the Portfolio purchases a put option it acquires the right to
sell a designated security at the exercise price, in each case on or before a
specified date (the "termination date"), usually not more than nine months from
the date the option is issued. The Portfolio may purchase call options to close
out a covered call position or to protect against an increase in the price of a
security it anticipates purchasing. The Portfolio may purchase put options on
securities which it holds in its portfolio only to protect against an increase
in the price of a security it anticipates purchasing. The Portfolio may purchase
put options on securities which it holds in its portfolio only to protect itself
against a decline in the value of the security. If the value of the underlying
security were to fall below the exercise price of the put purchased in an amount
greater than the premium paid for the option, the Portfolio would incur no
additional loss. The Portfolio may also purchase put options to close out
written put positions in a manner similar to call option closing purchase
transactions. There are no other limits on the Portfolio's ability to purchase
call and put options.
The primary risks associated with the use of options are (i) imperfect
correlation between the change in market value of the securities held by the
Portfolio and the prices of options relating to the securities purchased or sold
by the Portfolio; and (ii) possible lack of a liquid secondary market for an
option. Options that are not traded on an exchange (OTC options) are often
considered illiquid and may be difficult to value. In the opinion of the
Adviser, the risk that that Portfolio will be unable to close out an options
contract will be minimized by only entering into options transactions for which
there appears to be a liquid secondary market.
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REPURCHASE AGREEMENTS. Each Portfolio may enter into repurchase agreements
with brokers, dealers or banks that meet the credit guidelines established by
the Fund's Board of Directors. In a repurchase agreement, the Portfolio buys a
security from a seller that has agreed to repurchase it at a mutually agreed
upon date and price, reflecting the interest rate effective for the term of the
agreement. The term of these agreements is usually from overnight to one week
and never exceeds one year. Repurchase agreements may be viewed as a fully
collateralized loan of money by the Portfolio to the seller. The Portfolio
always receives securities with a market value at least equal to the purchase
price (including accrued interest) as collateral, and this value is maintained
during the term of the agreement. If the seller defaults and the collateral
value declines, the Portfolio might incur a loss. If bankruptcy proceedings are
commenced with respect to the seller, the Portfolio's realization upon the
collateral may be delayed or limited. The aggregate of certain repurchase
agreements and certain other investments is limited as set forth under
"Investment Limitations."
SHORT SALES
The Latin American Portfolio may from time to time sell securities short
without limitation, although initially the Portfolio does not intend to sell
securities short. A short sale is a transaction in which the Portfolio would
sell securities it does not own (but has borrowed) in anticipation of a decline
in the market price of securities. When the Portfolio makes a short sale, the
proceeds it receives from the sale will be held on behalf of a broker until the
Portfolio replaces the borrowed securities. To deliver the securities to the
buyer, the Portfolio will need to arrange through a broker to borrow the
securities and, in so doing, the Portfolio will become obligated to replace the
securities borrowed at their market price at the time of replacement, whatever
that price may be. The Portfolio may have to pay a premium to borrow the
securities and must pay any dividends or interest payable on the securities
until they are replaced.
The Portfolio's obligation to replace the securities borrowed in connection
with a short sale will be secured by collateral deposited with the broker that
consists of cash, U.S. Government Securities or other liquid, high grade debt
obligations. In addition, the Portfolio will place in a segregated account with
its Custodian an amount of cash, U.S. Government Securities or other liquid high
grade debt obligations equal to the difference, if any, between (1) the market
value of the securities sold at the time they were sold short and (2) any cash,
U.S. Government Securities or other liquid high grade debt obligations deposited
as collateral with the broker in connection with the short sale (not including
the proceeds of the short sale). Short sales by the Portfolio involve certain
risks and special considerations. Possible losses from short sales differ from
losses that could be incurred from a purchase of a security, because losses from
short sales may be unlimited, whereas losses from purchases can equal only the
total amount invested.
SOVEREIGN DEBT. The Latin American Portfolio's holdings of lower-quality
debt securities will consist predominantly of Sovereign Debt, much of which
trades at substantial discounts from face value. The Portfolio may invest in
Sovereign Debt of emerging market countries to hold and trade in appropriate
circumstances and to participate in debt to equity conversion programs.
Investment in Sovereign Debt involves a high degree of risk and such securities
are generally considered speculative in nature. The issuer or governmental
authorities that control the repayment of Sovereign Debt may not be able or
willing to repay the principal and/or interest when due in accordance with the
terms of such debt. A sovereign debtor's willingness or ability to repay
principal and interest due in a timely manner may be affected by, among other
factors, its cash flow situation, the extent of its foreign reserves, the
availability of sufficient foreign exchange on the date a payment is due, the
relative size of the debt service burden to the economy as a whole, the
sovereign debtor's policy towards the
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International Monetary Fund (the "IMF") and the political constraints to which a
sovereign debtor may be subject. Sovereign debtors may also be dependent on
expected disbursements from foreign governments, multilateral agencies and
others abroad to reduce principal and interest arrearages on their debt. The
commitment on the part of these governments, agencies and others to make such
disbursements may be conditioned on a sovereign debtor's implementation of
economic reforms and/or economic performance and the timely service of such
debtor's obligations. Failure to implement such reforms, achieve such levels of
economic performance or repay principal or interest when due may result in the
cancellation of such third parties' commitments to lend funds to the sovereign
debtor, which may further impair such debtor's ability or willingness to timely
service its debts. In certain instances, the Portfolio may invest in Sovereign
Debt that is in default as to payments of principal and/or interest. To the
extent the Portfolio is holding any non-performing Sovereign Debt, it may incur
additional expenses in connection with any restructuring of the issuer's
obligations or in otherwise enforcing its rights thereunder.
TEMPORARY INVESTMENTS. During periods in which the Adviser believes changes
in economic, financial or political conditions make it advisable, for temporary
defensive purposes the Latin American Portfolio may reduce its holdings in
equity and other securities and may invest in certain short-term (less than
twelve months to maturity) and medium-term (not greater than five years to
maturity) debt securities or may hold cash. The short-term and medium-term debt
securities in which the Portfolio may invest consist of (a) obligations of the
United States or emerging country governments (Latin American governments),
their respective agencies or instrumentalities; (b) bank deposits and bank
obligations (including certificates of deposit, time deposits and bankers'
acceptances) of United States or emerging country banks (Latin American banks)
denominated in any currency; (c) floating rate securities and other instruments
denominated in any currency issued by international development agencies; (d)
finance company and corporate commercial paper and other short-term corporate
debt obligations of United States and emerging country corporations (Latin
American corporations) meeting the Portfolio's credit quality standards; and (e)
repurchase agreements with banks and broker-dealers with respect to such
securities. See "Additional Investment Information -- Repurchase Agreements."
For temporary defensive purposes, the Portfolio intends to invest only in
short-term and medium-term debt securities that the Adviser believes to be of
high quality, i.e., subject to relatively low risk of loss of interest or
principal (there is currently no rating system for debt securities in most
emerging countries, including most Latin American countries.)
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each Portfolio of the Fund may
purchase securities on a when-issued or delayed delivery basis. In such
transactions, instruments are bought with payment and delivery taking place in
the future in order to secure what is considered to be an advantageous yield or
price at the time of the transaction. Delivery of and payment for these
securities may take as long as a month or more after the date of the purchase
commitment but will take place no more than 120 days after the trade date. Each
Portfolio will maintain with the Custodian a separate account with a segregated
portfolio of high-grade debt securities or equity securities or cash in an
amount at least equal to these commitments. The payment obligation and the
interest rates that will be received are each fixed at the time a Portfolio
enters into the commitment and no interest accrues to the Portfolio until
settlement. Thus, it is possible that the market value at the time of settlement
could be higher or lower than the purchase price if, among other factors, the
general level of interest rates has changed. It is a current policy of each
Portfolio not to enter into when-issued commitments or delayed delivery
securities exceeding in the aggregate 15% of the market value of the Portfolio's
total assets less liabilities, other than the obligations created by these
commitments.
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INVESTMENT LIMITATIONS
Each Portfolio, except the Latin American Portfolio, is a diversified
investment company under the 1940 Act and is therefore subject to the following
limitations: (a) as to 75% of its total assets, a Portfolio may not invest more
than 5% of its total assets in the securities of any one issuer, except
obligations of the U.S. Government and its agencies and instrumentalities, and
(b) a Portfolio may not own more than 10% of the outstanding voting securities
of any one issuer. The Latin American Portfolio is a non-diversified investment
company under the 1940 Act, which means that the Latin American Portfolio is not
limited by the 1940 Act in the proportion of its total assets that may be
invested in the obligations of a single issuer. Thus, the Latin American
Portfolio may invest a greater proportion of its total assets in the securities
of a smaller number of issuers and, as a result, will be subject to greater risk
with respect to their respective portfolio securities. The Latin American
Portfolio, however, intends to comply with the diversification requirements
imposed by the Internal Revenue Code of 1986, as amended, for qualification as a
regulated investment company. See "Taxes."
Each Portfolio also operates under certain investment restrictions that are
deemed fundamental limitations and may be changed only with the approval of the
holders of a majority of such Portfolio's outstanding shares. See "Investment
Limitations" in the Statement of Additional Information. In addition, each
Portfolio operates under certain non-fundamental investment limitations as
described below and in the Statement of Additional Information. Each Portfolio
may not (i) enter into repurchase agreements with more than seven days to
maturity if, as a result, more than 15% of the market value of the Portfolio's
net assets would be invested in these agreements and other investments for which
market quotations are not readily available or which are otherwise illiquid;
(ii) borrow money, except from banks for extraordinary or emergency purposes,
and then only in amounts up to 10% of the value of the Portfolio's total assets,
taken at cost at the time of borrowing, or purchase securities while borrowings
exceed 5% of its total assets, except the Latin American Portfolio is not
subject to such limits on borrowing and may borrow from banks and other entities
in amounts not in excess of 33 1/3% of its total assets (including the amount
borrowed) less liabilities; (iii) mortgage, pledge or hypothecate any assets
except in connection with any such borrowing in amounts up to 10% of the value
of the Portfolio's net assets at the time of borrowing; (iv) invest in fixed
time deposits with a duration of over seven calendar days; or (v) invest in
fixed time deposits with a duration of from two business days to seven calendar
days if more than 10% of the Portfolio's total assets would be invested in these
deposits.
MANAGEMENT OF THE FUND
INVESTMENT ADVISER. Morgan Stanley Asset Management Inc. is the Investment
Adviser and Administrator of the Fund and each of its portfolios. The Adviser
provides investment advice and portfolio management services, pursuant to an
Investment Advisory Agreement and, subject to the supervision of the Fund's
Board of Directors, makes each of the Portfolio's day-to-day investment
decisions, arranges for the execution of portfolio transactions and generally
manages each of the Portfolio's investments. Set forth below as an annual
percentage of average daily net assets are the management fees payable to the
Adviser quarterly by each Portfolio pursuant to the terms of the Investment
Advisory Agreement. The fees of each of the Portfolios, which involve
international investments, are higher than those of most investment companies
because they involve international investments but the Adviser believes the fees
are comparable to those of investment companies with similar
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objectives. The Adviser has agreed to a reduction in the fees payable to it and
to reimburse the Portfolios, if necessary, if such fees would cause total annual
operating expenses of the Portfolios to exceed the maximums set forth in the
table below.
<TABLE>
<CAPTION>
MAXIMUM TOTAL ANNUAL
OPERATING
EXPENSES AFTER FEE
MANAGEMENT WAIVERS
ABSENT FEE ---------------------
PORTFOLIO WAIVERS CLASS A CLASS B
- ---------------------------------------- ----------- -------- --------
<S> <C> <C> <C>
Global Equity 0.80% 1.00% 1.25%
International Equity 0.80% 1.00% 1.25%
International Small Cap 0.95% 1.15% N/A
Asian Equity 0.80% 1.00% 1.25%
European Equity 0.80% 1.00% 1.25%
Japanese Equity 0.80% 1.00% 1.25%
Latin American 1.10% 1.70% 1.95%
</TABLE>
The Adviser, with principal offices at 1221 Avenue of the Americas, New
York, New York 10020, conducts a worldwide portfolio management business,
provides a broad range of portfolio management services to customers in the
United States and abroad. At December 31, 1995, the Adviser, together with its
affiliated asset management companies, managed investments totaling
approximately $57.4 billion, including approximately $41.9 billion under active
management and $15.5 billion as Named Fiduciary or Fiduciary Adviser. See
"Management of the Fund" in the Statement of Additional Information.
PORTFOLIO MANAGERS The following individuals have primary portfolio
management responsibility for the Portfolios noted below:
GLOBAL EQUITY PORTFOLIO -- FRANCES CAMPION. Frances Campion joined the
Adviser in January 1990 as a Global Equity Fund Manager and is now a Principal
of Morgan Stanley. Her responsibilities include day to day management of the
Global Equity product. Prior to joining the Adviser, Ms. Campion was a U.S.
equity analyst with Lombard Odler Limited where she had responsibility for the
management of global portfolios. Ms. Campion has ten years global investment
experience. She is a graduate of University of College, Dublin.
INTERNATIONAL EQUITY PORTFOLIO -- DOMINIC CALDECOTT. Dominic Caldecott is a
Managing Director and is responsible for research and stock selection in the
Pacific Basin and has been primarily responsible for managing the Portfolio's
assets since its inception. He has ten years professional experience, primarily
in Tokyo, Hong Kong, and Seoul. Prior to joining Morgan Stanley, he worked with
GT Management Group in Tokyo and Hong Kong, specializing in Pacific Basin
investment management. He became a Vice President of Morgan Stanley in 1987, a
principal in 1989, and a Managing Director in 1991. He is responsible for a
number of Pacific Basin investment programs for clients of Morgan Stanley. Mr.
Caldecott is a graduate of New College, Oxford, England.
INTERNATIONAL SMALL CAP PORTFOLIO -- MARGARET NAYLOR. Margaret Naylor is a
Principal of Morgan Stanley and works with Dominic Caldecott on Pacific Basin
research and stock selection. She joined the Adviser in March 1987 and has been
primarily responsible for managing the Portfolio's assets since December 1992.
Prior to joining the Adviser she spent three years at the Trade Policy Research
Centre, an independent research unit. Ms. Naylor is a graduate of the University
of York. Ms. Naylor became a Vice President of Morgan Stanley in 1993.
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ASIAN EQUITY PORTFOLIO -- EAN WAH CHIN. Ean Wah Chin is a Managing Director
of Morgan Stanley, and is responsible for the Adviser's regional Asia ex-Japan
operations based in Singapore. She has been primarily responsible for managing
the Portfolio's assets since its inception. Prior to joining Morgan Stanley in
1986, Ms. Chin spent eight years with the Monetary Authority of Singapore and
the Government of Singapore Investment Corporation, where she was a portfolio
manager of one of the largest portfolios in Asia. Ms. Chin was an ASEAN scholar
educated at the University of Singapore.
EUROPEAN EQUITY PORTFOLIO -- ROBERT SARGENT. Robert Sargent joined Morgan
Stanley International in May, 1986, and transferred to the Adviser in June,
1987. Mr. Sargent is now a Principal of Morgan Stanley and has been primarily
responsible for managing the Portfolio's assets since its inception. As the fund
manager with primary responsibility for continental European stock selection and
portfolio management, Mr. Sargent is closely involved with the Adviser's
fundamental research effort and company visiting program. He is a graduate of
York University, Toronto, Canada.
JAPANESE EQUITY PORTFOLIO -- DOMINIC CALDECOTT AND KUNIHIKO
SUGIO. Information about Mr. Caldecott is included under International Equity
Portfolio above. Mr. Caldecott is responsible for research and stock selection
in the Pacific Basin and has been primarily responsible for managing the
Portfolio's assets since its inception. Kunihiko Sugio joined the Adviser in
December 1993 as a Vice President and manages dedicated Japanese equity
portfolios. He has been primarily responsible for managing the Portfolio's
assets since its inception. Prior to joining Morgan Stanley, he worked with
Baring International Investment Management, Tokyo, where he was a Director and
fund manager. He graduated from Wakayama Kokuritsu University.
LATIN AMERICAN PORTFOLIO -- ROBERT L. MEYER. Robert Meyer joined the
Adviser in 1989 and is now a Principal of Morgan Stanley, with primary
responsibility for the Adviser's investments in all of Latin America and Israel.
He has had primary responsibility for managing the Portfolio's assets since its
inception. Robert is co-manager of the Latin American Discovery Fund, Inc. and
worked previously in the U.S. equity group at the Adviser. He was born in
Argentina and has a B.A. in Economics and Political Science from Yale College
and a J.D. from Harvard Law School.
ADMINISTRATOR. The Adviser also provides the Fund with administrative
services pursuant to an Administration Agreement. The services provided under
the Administration Agreement are subject to the supervision of the Officers and
Board of Directors of the Fund and include day-to-day administration of matters
related to the corporate existence of the Fund, maintenance of its records,
preparation of reports, supervision of the Fund's arrangements with its
custodian, assistance in the preparation of the Fund's registration statements
under federal and state laws. The Administration Agreement also provides that
the Administrator through its agents will provide the Fund dividend disbursing
and transfer agent services. For its services under the Administration
Agreement, the Fund pays the Adviser a monthly fee which on an annual basis
equals 0.15% of the average daily net assets of each Portfolio.
Under an agreement between the Adviser and The Chase Manhattan Bank, N.A.
("Chase"), Chase provides certain administrative services to the Fund. In a
merger completed on September 1, 1995, Chase succeeded to all of the rights and
obligations under the U.S. Trust Administration Agreement between the Adviser
and the United States Trust Company of New York ("U.S. Trust"), pursuant to
which U.S. Trust had agreed to provide certain administrative services to the
Fund. Pursuant to a delegation clause in the U.S. Trust Administration
Agreement, U.S. Trust delegated its administration responsibilities to Chase
Global Funds Services Company
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("CGFSC"), formerly known as Mutual Funds Service Company, which after the
merger with Chase is a subsidiary of Chase and will continue to provide certain
administrative services to the Fund. The Adviser supervises and monitors such
administrative services provided by CGFSC. The services provided under the
Administration Agreement and the U.S. Trust Administration Agreement are also
subject to the supervision of the Board of Directors of the Fund. The Board of
Directors of the Fund has approved the provision of services described above
pursuant to the Administration Agreement and the U.S. Trust Administration
Agreement as being in the best interests of the Fund. CGFSC's business address
is 73 Tremont Street, Boston, Massachusetts 02108-3913. For additional
information regarding the Administration Agreement, or the U.S. Trust
Administration Agreement, see "Management of the Fund" in the Statement of
Additional Information.
LOCAL ADMINISTRATORS FOR THE LATIN AMERICAN PORTFOLIO
The Portfolio has entered into an administration agreement (the "Chilean
Administration Agreement") with Bice Chileconsult Agente de Valores S.A. (the
"Chilean Administrator"), a Chilean corporation, pursuant to which the Chilean
Administrator acts as the Portfolio's legal representative in Chile. Under the
Chilean Administration Agreement, the Chilean Administrator performs various
services for the Portfolio, including making and obtaining all exchange control
filings and approvals required for the Portfolio to effect investment and other
transactions in Chile and to remit moneys and other assets outside of Chile,
obtaining from the relevant authorities in Chile all confirmations or consents
relating to the tax status of the Portfolio and all tax rebates and other
payments which may be due to the Portfolio, and performing all other
administrative duties in Chile required by Chilean law or Chilean authorities
through instructions or regulations to be performed. For its services, the
Chilean Administrator is paid an annual fee by the Fund equal to the greater of
0.125% of the Portfolio's average weekly net assets invested in Chile or
$20,000, paid monthly. Unless terminated by the Fund's Board of Directors upon
60 days' prior written notice, or by the Chilean Administration upon 90 days'
prior written notice, the Chilean Administration Agreement will continue
automatically from year to year.
The Latin American Portfolio is required under Brazilian law to have a local
administrator in Brazil. Unibanco-Uniao (the "Brazilian Administrator"), a
Brazilian corporation, acts as the Portfolio's Brazilian administrator pursuant
to an agreement with the Portfolio (the "Brazilian Administration Agreement").
Under the Brazilian Administration Agreement, the Brazilian Administrator
performs various services for the Portfolio, including effecting the
registration of the Portfolio's foreign capital with the Central Bank of Brazil,
effecting all foreign exchange transactions related to the Portfolio's
investments in Brazil and obtaining all approvals required for the Portfolio to
make remittances of income and capital gains and for the repatriation of the
Portfolio's investments pursuant to Brazilian law. For its services, the
Brazilian Administrator is paid an annual fee equal to 0.125% of the Portfolio's
average weekly net assets invested in Brazil, paid monthly. The principal office
of the Brazilian Administrator is located at Avenida Eusebio Matoso, 891, Sao
Paulo, S.P., Brazil. The Brazilian Administration Agreement is terminable upon
six months' notice by either party; the Brazilian Administrator may be replaced
only by an entity authorized to act as a joint manager of a managed portfolio of
bonds and securities under Brazilian law.
The Portfolio is required under Colombian law to have a local administrator
in Colombia. CitiTrust S.A. (the "Colombian Administrator"), a Colombian Trust
Company, acts as the Portfolio's Colombian administrator pursuant to an
agreement with the Portfolio (the "Colombian Agreement"). Under the Colombian
Agreement, the Columbian Administrator performs various services for the
Portfolio, including effecting all foreign exchange transactions related to the
Portfolio's foreign capital with the Central Bank of Colombia, effecting all
foreign
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exchange transactions related to the Portfolio's investments in Colombia and
obtaining all approvals required for the Portfolio to make remittances of income
and capital gains and the repatriation of the Portfolio's investment pursuant to
Colombian law. For its services, the Colombian Administrator is paid an annual
fee of $1,000 plus .20% per transaction. The principal office of the Colombian
Administrator is located at Sociedad Fiduciaria International S.A., 8-89, Piso
2, Santa Fe de Bogota, Colombia. The Colombian Agreement is terminable upon 30
days' notice by either party. The Colombian Administrator may be replaced only
by an entity authorized to act as a joint manager of a managed portfolio of
bonds and securities under Colombian law.
DIRECTORS AND OFFICERS. Pursuant to the Fund's Articles of Incorporation,
the Board of Directors decides upon matters of general policy and reviews the
actions of the Fund's Adviser, Administrator and Distributor. The officers of
the Fund conduct and supervise its daily business operations.
DISTRIBUTOR. Morgan Stanley serves as the exclusive Distributor of the
shares of the Fund. Under its Distribution Agreement with the Fund, Morgan
Stanley sells shares of each Portfolio upon the terms and at the current
offering price described in this Prospectus. Morgan Stanley is not obligated to
sell any certain number of shares of any Portfolio and receives no compensation
for its distribution services.
The Portfolios currently offer only the classes of shares offered by this
Prospectus. The Portfolios may in the future offer one or more classes of shares
with features, distribution expenses or other expenses that are different from
those of the classes currently offered.
The Fund has adopted a Plan of Distribution with respect to the Class B
shares of each Multiclass Portfolio pursuant to Rule 12b-1 under the 1940 Act
(each, a "Plan"). Under each Plan, the Distributor is entitled to receive from
each Multiclass Portfolio a distribution fee, which is accrued daily and paid
quarterly, of 0.25% of the Class B shares' average daily net assets on an
annualized basis. The distributor expects to reallocate most of its fee to its
investment representatives. The Distributor may, in its discretion, voluntarily
waive from time to time all or any portion of its distribution fee and each of
the Distributor and the Adviser is free to make additional payments out of its
own assets to promote the sale of Fund shares, including payments that
compensate financial institutions for distribution services or shareholder
services.
Each Plan is designed to compensate the Distributor for its services, not to
reimburse the Distributor for its expenses, and the Distributor may retain any
portion of the fee that it does not expend in fulfillment of its obligations to
the Fund.
EXPENSES. Each Portfolio is responsible for payment of certain other fees
and expenses (including legal fees, accountant's fees, custodial fees and
printing and mailing costs) specified in the Administration and Distribution
Agreements.
PURCHASE OF SHARES
Class A shares of each Portfolio and Class B shares of each Multiclass
Portfolio may be purchased, without sales commission, at the net asset value per
share next determined after receipt of the purchase order by the Portfolio. See
"Valuation of Shares."
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MINIMUM INVESTMENT AND ACCOUNT SIZES; CONVERSION FROM CLASS A TO CLASS B SHARES
For a Multiclass Portfolio account opened on or after January 2, 1996 (a
"New Multiclass Account"), the minimum initial investment and minimum account
size are $500,000 for Class A shares of each Portfolio and $100,000 for Class B
shares of each Multiclass Portfolio. The International Equity Portfolio is
currently closed to new investors, with the exception of certain Morgan Stanley
customers. The minimum initial investment for Class A shares of the
International Small Cap Portfolio is $500,000. Managed Accounts may purchase
Class A shares without being subject to such minimum initial investment or
minimum account size requirements for a Portfolio account. Officers of the
Adviser and its affiliates are subject to the minimums for a Portfolio account,
except they may purchase Class B shares subject to a minimum initial investment
and minimum account size of $5,000 for a Multiclass Portfolio account.
If the value of a New Multiclass Account containing Class A shares falls
below $500,000 (but remains at or above $100,000) because of shareholder
redemption(s), the Fund will notify the shareholders, and if the account value
remains below $500,000 (but remains at or above $100,000) for a continuous
60-day period, the Class A shares in such account will convert to Class B shares
and will be subject to the distribution fee and other features applicable to the
Class B shares. The Fund, however, will not convert Class A shares to Class B
shares based solely upon changes in the market that reduce the net asset value
of shares. Under current tax law, conversions between share classes are not a
taxable event to the shareholder.
Shares in a Portfolio account opened prior to January 2, 1996 were
designated Class A shares on January 2, 1996. Shares in a Multiclass Portfolio
account opened prior to January 2, 1996 (each, a "Pre-1996 Multiclass Account")
with a value of $100,000 or more on March 1, 1996 (a "Grandfathered Class A
Account") remained Class A shares regardless of account size thereafter. Except
for shares in a Managed Account, shares in a Pre-1996 Multiclass Account with a
value of less than $100,000 on March 1, 1996 (a "Grandfathered Class B Account")
converted to Class B shares on March 1, 1996. Grandfathered Class A Accounts and
Managed Accounts are not subject to conversion from Class A shares to Class B
shares.
Investors may also invest in the Fund by purchasing shares through a trust
department, broker, dealer, agent, financial planner, financial services firm or
investment adviser. An investor may be charged an additional service or
transaction fee by that institution. The minimum investment levels may be waived
at the discretion of the Adviser for (i) certain employees and customers of
Morgan Stanley or its affiliates and certain trust departments, brokers,
dealers, agents, financial planners, financial services firms, or investment
advisers that have entered into an agreement with Morgan Stanley or its
affiliates; and (ii) retirement and deferred compensation plans and trusts used
to fund such plans, including, but not limited to, those defined in Section
401(a), 403(b) or 457 of the Internal Revenue Code of 1986, as amended, and
"rabbi trusts." The Fund reserves the right to modify or terminate the
conversion features of the shares as stated above at any time upon 60-days'
notice to shareholders.
MINIMUM ACCOUNT SIZES AND INVOLUNTARY REDEMPTION OF SHARES
If the value of a New Multiclass Account falls below $100,000 because of
shareholder redemptions(s), the Fund will notify the shareholder, and if the
account value remains below $100,000 for a continuous 60-day period, the shares
in such account are subject to redemption by the Fund and, if redeemed, the net
asset value of such shares will be promptly paid to the shareholder. The Fund,
however, will not redeem shares based solely upon changes in the market that
reduce the net asset value of shares.
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For purposes of redemptions by the Fund, the foregoing minimum account size
requirements do not apply to New Multiclass Accounts containing Class B shares
held by officers of the Adviser or its affiliates. However, if the value of such
account held by an officer of the Adviser or its affiliates falls below $5,000
because of shareholder redemption(s), the Fund will notify the shareholder, and
if the account value remains below $5,000 for a continuous 60-day period, the
shares in such account are subject to redemption by the Fund and, if redeemed,
the net asset value of such shares will be promptly paid to the shareholder.
Grandfathered Class A Accounts, Grandfathered Class B Accounts and Managed
Accounts are not subject to involuntary redemption.
If a shareholder reduces its total investment in Class A shares of the
International Small Cap Portfolio to less than $500,000, the investment may be
subject to redemption.
The Fund reserves the right to modify or terminate the involuntary
redemption features of the shares as stated above at any time upon 60-days'
notice to shareholders.
CONVERSION FROM CLASS B TO CLASS A SHARES
If the value of Class B shares in a Multiclass Portfolio account increases,
whether due to shareholder share purchases or market activity, to $500,000 or
more, the Class B shares will convert to Class A shares. Under current tax law,
such conversion is not a taxable event to the shareholder. Class A shares
converted from Class B shares are subject to the same minimum account size
requirements that are applicable to New Multiclass Accounts containing Class A
shares, as stated above. The Fund reserves the right to modify or terminate this
conversion feature at any time upon 60-days' notice to shareholders.
INITIAL PURCHASES DIRECTLY FROM THE FUND
The Fund's determination of an investor's eligibility to purchase shares of
a given class will take precedence over the investor's selection of a class.
Assuming the investor is eligible for the class, the Fund will select the most
favorable class for the investor, if the investor has not done so.
1) BY CHECK. An account may be opened by completing and signing an Account
Registration Form and mailing it, together with a check ($500,000 minimum for
Class A shares of each Portfolio and $100,000 minimum for Class B shares of
each Multiclass Portfolio, with certain exceptions for Morgan Stanley
employees and select customers) payable to "Morgan Stanley Institutional
Fund, Inc. -- [portfolio name]", to:
Morgan Stanley Institutional Fund, Inc.
P.O. Box 2798
Boston, Massachusetts 02208-2798
Payment will be accepted only in United States dollars, unless prior approval
for payment in other currencies is given by the Fund. The Portfolio(s) to be
purchased should be designated on the Account Registration Form. For purchases
by check, the Fund is ordinarily credited with Federal Funds within one
business day. Thus your purchase of shares by check is ordinarily credited to
your account at the net asset value per share of the relevant Portfolio
determined on the next business day after receipt.
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2) BY FEDERAL FUNDS WIRE. Purchases may be made by having your bank wire
Federal Funds to the Fund's bank account. In order to ensure prompt receipt
of your Federal Funds Wire, it is important that you follow these steps:
A. Telephone the Fund (toll free: 1-800-548-7786) and provide us with your
name, address, telephone number, Social Security or Tax Identification
Number, the portfolio(s) selected, the class selected, the amount being
wired, and by which bank. We will then provide you with a Fund account
number. (Investors with existing accounts should also notify the Fund prior
to wiring funds.)
B. Instruct your bank to wire the specified amount to the Fund's Wire
Concentration Bank Account (be sure to have your bank include the name of
the portfolio(s) selected, the class selected, and the account number
assigned to you) as follows:
Chase Manhattan Bank, N.A.
One Manhattan Plaza
New York, NY 10081-1000
ABA #021000021
DDA #910-2-733293
Attn: Morgan Stanley Institutional Fund, Inc.
Ref: (Portfolio name, your account number, your account name)
Please call the Funds at 1-800-548-7786 prior to wiring funds.
C. Complete and sign the Account Registration Form and mail it to the address
shown thereon.
Purchase orders for shares of the Portfolios which are received prior to the
regular close of the NYSE (currently 4:00 p.m. Eastern Time) will be executed
at the price computed on the date of receipt as long as the Transfer Agent
receives payment by check or in Federal Funds prior to the regular close of
the NYSE on such day.
Federal Funds purchase orders will be accepted only on a day on which the Fund
and Chase (the "Custodian Bank") are open for business. Your bank may charge a
service fee for wiring Federal Funds.
3) BY BANK WIRE. The same procedure outlined under "By Federal Funds Wire"
above must be followed in purchasing shares by bank wire. However, money
transferred by bank wire may or may not be converted into Federal Funds the
same day, depending on the time the money is received and the bank handling
the wire. Prior to such conversion, an investor's money will not be invested
and, therefore, will not be earning dividends. Your bank may charge a service
fee for wiring funds.
ADDITIONAL INVESTMENTS
You may add to your account at any time (minimum additional investment
$1,000 for each portfolio, except for automatic reinvestment of dividends and
capital gains distributions for which there are no minimums) by purchasing
shares at net asset value by mailing a check to the Fund (payable to "Morgan
Stanley Institutional Fund -- [portfolio name]") at the above address or by
wiring monies to the Custodian Bank as outlined above. It is very important that
your account name, the portfolio name and the class selected be specified in the
letter or wire to assure proper crediting to your account. In order to ensure
that your wire orders are invested promptly,
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you are requested to notify one of the Fund's representatives (toll-free
1-800-548-7786) prior to the wire date. Additional investments will be applied
to purchase additional shares in the same class held by a shareholder in a
Portfolio account.
OTHER PURCHASE INFORMATION
The purchase price of the Class A and Class B shares of each Portfolio is
the net asset value next determined after the order is received. See "Valuation
of Shares." An order received prior to the regular close of the New York Stock
Exchange ("NYSE"), which is currently 4:00 p.m. Eastern Time, will be executed
at the price computed on the date of receipt; an order received after the
regular close of the NYSE will be executed at the price computed on the next day
the NYSE is open as long as the Transfer Agent receives payment by check or in
Federal Funds prior to the regular close of the NYSE on such day.
Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends. The net asset value of Class B shares will generally be
lower than the net asset value of Class A shares as a result of the distribution
expense charged to Class B shares. It is expected, however, that the net asset
value per share of the two classes will tend to converge immediately after the
recording of dividends which will differ by approximately the amount of the
distribution expense accrual differential between the classes.
In the interest of economy and convenience, and because of the operating
procedures of the Fund, certificates representing shares of the Portfolio(s)
will not be issued. All shares purchased are confirmed to you and credited to
your account on the Fund's books maintained by the Adviser or its agents. You
will have the same rights and ownership with respect to such shares as if
certificates had been issued.
To ensure that checks are collected by the Fund, withdrawals of investments
made by check are not presently permitted until payment for the purchase has
been received which may take up to eight business days after the date of
purchase. As a condition of this offering, if a purchase is cancelled due to
nonpayment or because your check does not clear, you will be responsible for any
loss the Fund or its agents incur. If you are already a shareholder, the Fund
may redeem shares from your account(s) to reimburse the Fund or its agents for
any loss. In addition, you may be prohibited or restricted from making future
investments in the Fund.
Investors may also invest in the Fund by purchasing shares through the
Distributor.
EXCESSIVE TRADING
Frequent trades involving either substantial portfolio assets or a
substantial portion of your account or accounts controlled by you can disrupt
management of a portfolio and raise its expenses. Consequently, in the interest
of all the stockholders of the Portfolios and the Portfolios' performance, the
Fund may in its discretion bar a stockholder that engages in excessive trading
of shares of any class of a portfolio from further purchases of shares of the
Fund for an indefinite period. The Fund considers excessive trading to be more
than one purchase and sale involving shares of the same class of a portfolio of
the Fund within any 120-day period. As an example, exchanging shares of
portfolios of the Fund as follows amounts to excessive trading: exchanging Class
A shares of Portfolio A for Class A shares of Portfolio B, then exchanging Class
A shares of Portfolio B for Class A shares of Portfolio C and again exchanging
Class A shares of Portfolio C for Class A shares of Portfolio B within a 120-day
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period. Two types of transactions are exempt from these excessive trading
restrictions: (1) trades exclusively between money market portfolios; and (2)
trades done in connection with an asset allocation service, such as TFM
Accounts, managed or advised by MSAM and/or any of its affiliates.
REDEMPTION OF SHARES
You may withdraw all or any portion of the amount in your account by
redeeming shares at any time. Please note that purchases made by check are not
permitted to be redeemed until payment of the purchase has been collected, which
may take up to eight business days after purchase. The Fund will redeem Class A
shares of each Portfolio or Class B shares of each Multiclass Portfolio at the
next determined net asset value of shares of the applicable class. On days that
both the NYSE and the Custodian Bank are open for business, the net asset values
per share of each of the Portfolios are determined at the regular close of
trading of the NYSE (currently 4:00 p.m. Eastern Time). Shares of each Portfolio
may be redeemed by mail or telephone. No charge is made for redemptions, except
for the imposition of the 1% transaction fee described under "Fund Expenses"
above, which may be assessed in connection with redemptions of shares of the
International Small Cap Portfolio. Any redemption proceeds may be more or less
than the purchase price of your shares depending on, among other factors, the
market value of the investment securities held by a Portfolio.
BY MAIL
Each Portfolio will redeem its Class A or Class B shares at the net asset
value determined on the date the request is received, if the request is received
in "good order" before the regular close of the NYSE. Your request should be
addressed to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798, Boston,
Massachusetts 02208-2798, except that deliveries by overnight courier should be
addressed to Morgan Stanley Institutional Fund, Inc., c/o Chase Global Funds
Services Company, 73 Tremont Street, Boston, Massachusetts 02108-3913.
"Good order" means that the request to redeem shares must include the
following documentation:
(a) A letter of instruction or a stock assignment specifying the class
and number of shares or dollar amount to be redeemed, signed by all
registered owners of the shares in the exact names in which they are
registered;
(b) Any required signature guarantees (see "Further Redemption
Information" below); and
(c) Other supporting legal documents, if required, in the case of
estates, trusts, guardianships, custodianships, corporations, pension and
profit sharing plans and other organizations.
Shareholders who are uncertain of requirements for redemption should consult
with a Morgan Stanley Institutional Fund representative.
BY TELEPHONE
Provided you have previously elected the Telephone Redemption Option on the
Account Registration Form, you can request a redemption of your shares by
calling the Fund and requesting the redemption proceeds be mailed to you or
wired to your bank. Please contact one of Morgan Stanley Institutional Fund's
representatives for further details. In times of drastic market conditions, the
telephone redemption option may be difficult to implement. If you experience
difficulty in making a telephone redemption, your request may be made by regular
mail or express mail and it will be implemented at the net asset value next
determined after it is received.
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Redemption requests sent to the Fund through express mail must be mailed to the
address of the Dividend Disbursing and Transfer Agent listed under "General
Information". The Fund and the Fund's transfer agent (the "Transfer Agent") will
employ reasonable procedures to confirm that the instructions communicated by
telephone are genuine. Redemption requests sent to the Fund through express mail
must be mailed to the address of the Dividend Disbursing and Transfer Agent
listed under "General Information". These procedures include requiring the
investor to provide certain personal identification information at the time an
account is opened and prior to effecting each transaction requested by
telephone. In addition, all telephone transaction requests will be recorded and
investors may be required to provide additional telecopied written instructions
regarding transaction requests. Neither the Fund nor the Transfer Agent will be
responsible for any loss, liability, cost or expense for following instructions
received by telephone that either of them reasonably believes to be genuine.
To change the commercial bank or account designated to receive redemption
proceeds, a written request must be sent to the Fund at the address above.
Requests to change the bank or account must be signed by each shareholder and
each signature must be guaranteed.
FURTHER REDEMPTION INFORMATION
Normally the Fund will make payment for all shares redeemed within one
business day of receipt of the request, but in no event will payment be made
more than seven days after receipt of a redemption request in good order.
However, payments to investors redeeming shares which were purchased by check
will not be made until payment for the purchase has been collected, which may
take up to eight days after the date of purchase. The Fund may suspend the right
of redemption or postpone the date upon which redemptions are effected at times
when the NYSE is closed, or under any emergency circumstances as determined by
the Securities and Exchange Commission (the "Commission").
If the Board of Directors determines that it would be detrimental to the
best interests of the remaining shareholders of a Portfolio to make payment
wholly or partly in cash, the Fund may pay the redemption proceeds in whole or
in part by a distribution in-kind of securities held by a Portfolio in lieu of
cash in conformity with applicable rules of the Commission.
Distributions-in-kind will be made in readily marketable securities. Investors
may incur brokerage charges on the sale of portfolio securities so received in
payment of redemptions.
To protect your account, the Fund and its agents from fraud, signature
guarantees are required for certain redemptions to verify the identity of the
person who has authorized a redemption from your account. Please contact the
Fund for further information. See "Redemption of Shares" in the Statement of
Additional Information.
SHAREHOLDER SERVICES
EXCHANGE FEATURES
You may exchange shares that you own in any Portfolio for shares of any
other available portfolio(s) of the Fund (other than the International Equity
Portfolio, which is closed to new investors). In exchanging for shares of a
portfolio with more than one class, the class of shares you receive in the
exchange will be determined in the same manner as any other purchase of shares
and will not be based on the class of shares surrendered for the exchange.
Consequently, the same minimum initial investment and minimum account size for
determining the class of shares received in the exchange will apply. See
"Purchase of Shares." Shares of the portfolios may be exchanged by mail or
telephone. The privilege to exchange shares by telephone is automatic and made
available
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without shareholder election. Before you make an exchange, you should read the
prospectus of the portfolio(s) in which you seek to invest. Because an exchange
transaction is treated as a redemption followed by a purchase, an exchange would
be considered a taxable event for shareholders subject to tax. The exchange
privilege is only available with respect to portfolios that are registered for
sale in a shareholder's state of residence. The exchange privilege may be
modified or terminated by the Fund at any time upon 60-days' notice to
shareholders.
BY MAIL
In order to exchange shares by mail, you should include in the exchange
request the name, class of shares and account number of your current Portfolio,
the name(s) of the portfolio(s) and class(es) of shares into which you intend to
exchange shares, and the signatures of all registered account holders. Send the
exchange request to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798,
Boston, Massachusetts 02208-2798.
BY TELEPHONE
When exchanging shares by telephone, have ready the name, class of shares
and account number of your current Portfolio, the name(s) of the portfolio into
which you intend to exchange shares, your Social Security number or Tax I.D.
number, and your account address. Requests for telephone exchanges received
prior to 4:00 p.m. (Eastern Time) are processed at the close of business that
same day based on the net asset value of the class(es) of the portfolios
involved in the exchange of shares at the close of business. Requests received
after 4:00 p.m. (Eastern Time) are processed the next business day based on the
net asset value determined at the close of business on such day. For additional
information regarding responsibility for the authenticity of telephoned
instructions, see "Redemption of Shares -- By Telephone" above.
TRANSFER OF REGISTRATION
You may transfer the registration of any of your Fund shares to another
person by writing to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798,
Boston, Massachusetts 02208-2798. As in the case of redemptions, the written
request must be received in good order before any transfer can be made.
Transferring the registration of shares may affect the eligibility of your
account for a given class of the Portfolio's shares may result in involuntary
conversion or redemption of your shares. See "Purchase of Shares" above.
VALUATION OF SHARES
The net asset value per share of a class of shares of each of the Portfolios
is determined by dividing the total market value of the Portfolio's investments
and other assets attributable to such class, less any liabilities attributable
to such class, by the total number of outstanding shares of each class of the
Portfolio. Net asset value is calculated separately for each class of the
Portfolios. Net asset value per share is determined as of the regular close of
the NYSE on each day that the NYSE is open for business. Price information on
listed securities is taken from the exchange where the security is primarily
traded. Securities listed on a U.S. securities exchange for which market
quotations are available are valued at the last quoted sale price on the day the
valuation is made. Securities listed on a foreign exchange are valued at their
closing price. Unlisted securities and listed securities not traded on the
valuation date for which market quotations are not readily available are valued
at a price within a range not exceeding the current asked price nor less than
the current bid price. The current bid and asked prices are determined based on
the average bid and asked prices quoted on such valuation date by reputable
brokers.
46
<PAGE>
Bonds and other fixed income securities are valued according to the broadest
and most representative market, which will ordinarily be the over-the-counter
market. Net asset value includes interest on fixed income securities, which is
accrued daily. In addition, bonds and other fixed income securities may be
valued on the basis of prices provided by a pricing service when such prices are
believed to reflect the fair market value of such securities. The prices
provided by a pricing service are determined without regard to bid or last sale
prices but take into account institutional size trading in similar groups of
securities and any developments related to the specific securities. Securities
not priced in this manner are valued at the most recently quoted bid price, or,
when securities exchange valuations are used, at the latest quoted sale price on
the day of valuation. If there is no such reported sale, the latest quoted bid
price will be used. Securities purchased with remaining maturities of 60 days or
less are valued at amortized cost, if it approximates market value. In the event
that amortized cost does not approximate market value, market prices as
determined above will be used.
The value of other assets and securities for which no quotations are readily
available (including restricted and unlisted foreign securities) and those
securities for which it is inappropriate to determine the prices in accordance
with the above-stated procedures are determined in good faith at fair value
using methods determined by the Board of Directors. For purposes of calculating
net asset value per share, all assets and liabilities initially expressed in
foreign currencies will be translated into U.S. dollars at the mean of the bid
price and asked price for such currencies against the U.S. dollar last quoted by
any major bank.
Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends for the class. Dividends will differ by approximately the
amount of the distribution expense accrual differential among the classes. The
net asset value of Class B shares will generally be lower than the net asset
value of the Class A shares as a result of the distribution expenses charged to
Class B shares.
PERFORMANCE INFORMATION
The Fund may from time to time advertise the "total return" for each class
of a Portfolio. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT
INTENDED TO INDICATE FUTURE PERFORMANCE.
Each of the Portfolios may advertise "total return" which shows what an
investment in a class of a Portfolio would have earned over a specified period
of time (such as one, five or ten years) assuming that all distributions and
dividends by the Portfolio were reinvested in the same class on the reinvestment
dates during the period. Total return does not take into account any federal or
state income taxes that may be payable on dividends and distributions or on
redemption. The Fund may also include comparative performance information in
advertising or marketing the Portfolios' shares, including data from Lipper
Analytical Services, Inc., other industry publications, business periodicals,
rating services and market indices.
The performance figures for Class B shares will generally be lower than
those for Class A shares because of the distribution fee charged to Class B
shares.
47
<PAGE>
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All income dividends and capital gains distributions for a class of shares
will automatically be reinvested in additional shares at net asset value, except
that, upon written notice to the Fund or by checking off the appropriate box in
the Distribution Option Section on the Account Registration Form, a shareholder
may elect to receive income dividends and capital gains distributions in cash.
Each Portfolio expects to distribute substantially all of its net investment
income in the form of annual dividends. Net realized gains, if any, after
reduction for any available tax loss carryforwards will also be distributed
annually. Confirmations of the purchase of shares of the Portfolio through the
automatic reinvestment of income dividends and capital gains distributions will
be provided, pursuant to Rule 10b-10(b) under the Securities Exchange Act of
1934, as amended, on the next monthly client statement following such purchase
of shares. Consequently, confirmation of such purchases will not be provided at
the time of completion of such purchases as might otherwise be required by Rule
10b-10. Net capital gains, if any, will be distributed annually.
Undistributed net investment income is included in a Portfolio's net assets
for the purpose of calculating net asset value per share. Therefore, on the
"ex-dividend" date, the net asset value per share excludes the dividend (i.e.,
is reduced by the per share amount of the dividend). Dividends paid shortly
after the purchase of shares by an investor, although in effect a return of
capital, are taxable to shareholders subject to income tax.
Because of the distribution fee and any other expenses that may be
attributable to the Class B shares, the net income attributable to and the
dividends payable on Class B shares will be lower than the net income
attributable to and the dividends payable on Class A shares. As a result, the
net asset value per share of the classes of the Portfolios will differ at times.
Expenses of the Portfolios allocated to a particular class of shares thereof
will be borne on a pro rata basis by each outstanding share of that class.
TAXES
The following summary of certain federal income tax consequences is based on
current tax laws and regulations, which may be changed by legislative, judicial,
or administrative action.
No attempt has been made to present a detailed explanation of the federal,
state, or local income tax treatment of the Portfolios or their shareholders.
Accordingly, shareholders are urged to consult their tax advisers regarding
specific questions as to federal, state and local income taxes.
Each Portfolio is treated as a separate entity for federal income tax
purposes and is not combined with the Fund's other Portfolios. Each Portfolio
intends to qualify for the special tax treatment afforded regulated investment
companies under Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"), so that the Portfolio will be relieved of federal income tax on
that part of its net investment income and net capital gain that is distributed
to shareholders.
Each Portfolio distributes substantially all of its net investment income
(including, for this purpose, net short-term capital gain) to shareholders.
Dividends from a Portfolio's net investment income are taxable to shareholders
as ordinary income, whether received in cash or in additional shares. Such
dividends paid by a Portfolio will generally qualify for the 70%
dividends-received deduction for corporate shareholders only to the extent of
the aggregate qualifying dividend income received by the Portfolio from U.S.
corporations. Each Portfolio will report annually to its shareholders the amount
of dividend income qualifying for such treatment.
48
<PAGE>
Distributions of net capital gain (the excess of net long-term capital gain
over net short-term capital loss) are taxable to shareholders as long-term
capital gain, regardless of how long shareholders have held their shares. Each
Portfolio sends reports annually to its shareholders of the federal income tax
status of all distributions made during the preceding year.
Each Portfolio intends to make sufficient distributions or deemed
distributions of its ordinary income and capital gain net income (the excess of
short-term and long-term capital gains over short-term and long-term capital
losses), including any available capital loss carryforwards, prior to the end of
each calendar year to avoid liability for federal excise tax.
Dividends and other distributions declared by a Portfolio in October,
November or December of any year and payable to shareholders of record on a date
in such month will be deemed to have been paid by the Portfolio and received by
the shareholders in that year if the distributions are paid by the Portfolio at
any time during the following January.
The sale, exchange or redemption of shares may result in taxable gain or
loss to the selling, exchanging or redeeming shareholder, depending upon whether
the fair market value of the sale, exchange or redemption proceeds exceeds or is
less than the Shareholder's adjusted basis in the sold, exchanged or redeemed
shares. If capital gain distributions have been made with respect to shares that
are sold at a loss after being held for six months or less, then the loss is
treated as a long-term capital loss to the extent of the capital gain
distributions.
The conversion of Class A shares to Class B shares should not be a taxable
event to the shareholder.
Shareholders are urged to consult with their tax advisors concerning the
application of state and local income taxes to investments in a Portfolio, which
may differ from the federal income tax consequences described above.
Investment income received by a Portfolio from sources within foreign
countries may be subject to foreign income taxes withheld at the source. To the
extent that a Portfolio is liable for foreign income taxes so withheld, each
Portfolio intends to operate so as to meet the requirements of the Code to pass
through to the shareholders credit for foreign income taxes paid. Although each
Portfolio intends to meet Code requirements to pass through credit for such
taxes, there can be no assurance that each Portfolio will be able to do so.
THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED HEREIN FOR GENERAL
INFORMATION ONLY. PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS
WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN A PORTFOLIO.
PORTFOLIO TRANSACTIONS
The Investment Advisory Agreement authorizes the Adviser to select the
brokers or dealers that will execute the purchases and sales of investment
securities for each of the Fund's Portfolios and directs the Adviser to use its
best efforts to obtain the best available price and most favorable execution
with respect to all transactions for the Portfolios. The Fund has authorized the
Adviser to pay higher commissions in recognition of brokerage services which, in
the opinion of the Adviser, are necessary for the achievement of better
execution, provided the Adviser believes this to be in the best interest of the
Fund.
49
<PAGE>
Since shares of the Portfolios are not marketed through intermediary brokers
or dealers, it is not the Fund's practice to allocate brokerage or principal
business on the basis of sales of shares which may be made through such firms.
However, the Adviser may place portfolio orders with qualified broker-dealers
who recommend the Portfolios or who act as agents in the purchase of shares of
the Portfolios for their clients.
In purchasing and selling securities for a Portfolio, it is the Fund's
policy to seek to obtain quality execution at the most favorable prices, through
responsible broker-dealers. In selecting broker-dealers to execute the
securities transactions for the Portfolios, consideration will be given to such
factors as the price of the security, the rate of the commission, the size and
difficulty of the order, the reliability, integrity, financial condition,
general execution and operational capabilities of competing broker-dealers, and
the brokerage and research services which they provide to the Fund. Some
securities considered for investment by a Portfolio may also be appropriate for
other clients served by the Adviser. If purchase or sale of securities
consistent with the investment policies of a Portfolio and one or more of these
other clients served by the Adviser is considered at or about the same time,
transactions in such securities will be allocated among the Portfolio and such
other clients in a manner deemed fair and reasonable by the Adviser. Although
there is no specified formula for allocating such transactions, the various
allocation methods used by the Adviser, and the results of such allocations, are
subject to periodic review by the Fund's Board of Directors.
Subject to the overriding objective of obtaining the best possible execution
of orders, the Adviser may allocate a portion of the Fund's portfolio brokerage
transactions to Morgan Stanley or broker affiliates of Morgan Stanley. In order
for Morgan Stanley or its affiliates to effect any portfolio transactions for
the Portfolios, the commissions, fees or other remuneration received by Morgan
Stanley or such affiliates must be reasonable and fair compared to the
commissions, fees or other remuneration paid to other brokers in connection with
comparable transactions involving similar securities being purchased or sold on
a securities exchange during a comparable period of time. Furthermore, the Board
of Directors of the Fund, including a majority of those Directors who are not
"interested persons," as defined in the 1940 Act, have adopted procedures which
are reasonably designed to provide that any commissions, fees or other
remuneration paid to Morgan Stanley or such affiliates are consistent with the
foregoing standard.
Portfolio securities will not be purchased from or through, or sold to or
through, the Adviser or Morgan Stanley or any "affiliated persons," as defined
in the 1940 Act, of Morgan Stanley when such entities are acting as principals,
except to the extent permitted by law.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
The Fund was organized as a Maryland corporation on June 16, 1988. The
Articles of Incorporation, as amended and restated, permit the Fund to issue up
to 34 billion shares of common stock, with $.001 par value per share. Pursuant
to the Fund's Articles of Incorporation, the Board of Directors may increase the
number of shares the Fund is authorized to issue without the approval of the
shareholders of the Fund. Subject to the notice period to shareholders with
respect to shares held by shareholders, the Board of Directors has the power to
designate one or more classes of shares of common stock and to classify and
reclassify any unissued shares with
50
<PAGE>
respect to such classes. The shares of common stock of each Portfolio are
currently classified into two classes, the Class A shares and the Class B
shares, except for the International Small Cap, Money Market and Municipal Money
Market Portfolios, which only offer Class A shares.
The shares of each Portfolio, when issued, will be fully paid,
nonassessable, fully transferable and redeemable at the option of the holder.
The shares have no preference as to conversion, exchange, dividends, retirement
or other features and have no pre-emptive rights. The shares of each Portfolio
have non-cumulative rights, which means that the holders of more than 50% of the
shares voting for the election of Directors can elect 100% of the Directors if
they choose to do so. Persons or organizations owning 25% or more of the
outstanding shares of a Portfolio may be presumed to "control" (as defined in
the 1940 Act) such Portfolio. Under Maryland law, the Fund is not required to
hold an annual meeting of its shareholders unless required to do so under the
1940 Act.
REPORTS TO SHAREHOLDERS
The Fund will send to its shareholders annual and semi-annual reports; the
financial statements appearing in annual reports are audited by independent
accountants. Monthly unaudited portfolio data is also available from the Fund
upon request.
In addition, the Adviser or its agent, as Transfer Agent, will send to each
shareholder having an account directly with the Fund a monthly statement showing
transactions in the account, the total number of shares owned, and any dividends
or distributions paid.
CUSTODIAN
As of September 1, 1995, domestic securities and cash are held by Chase
which replaced U.S. Trust as the Fund's domestic custodian. Chase is not an
affiliate of the Adviser or the Distributor. Morgan Stanley Trust Company,
Brooklyn, New York ("MSTC"), an affiliate of the Adviser and the Distributor,
acts as the Fund's custodian for foreign assets held outside the United States
and employs subcustodians approved by the Board of Directors of the Fund in
accordance with regulations of the Securities and Exchange Commission for the
purpose of providing custodial services for such assets. MSTC may also hold
certain domestic assets for the Fund. For more information on the custodians,
see "General Information -- Custody Arrangements" in the Statement of Additional
Information.
DIVIDEND DISBURSING AND TRANSFER AGENT
Chase Global Funds Services Company, 73 Tremont Street, Boston,
Massachusetts 02108-3913, acts as Dividend Disbursing and Transfer Agent for the
Fund.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP serves as independent accountants for the Fund and
audits its annual financial statements.
LITIGATION
The Fund is not involved in any litigation.
51
<PAGE>
<TABLE>
<CAPTION>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
GLOBAL EQUITY, INTERNATIONAL EQUITY, INTERNATIONAL SMALL CAP,
ASIAN EQUITY, EUROPEAN EQUITY, JAPANESE EQUITY
AND LATIN AMERICAN PORTFOLIOS
P.O. BOX 2798, BOSTON, MA 02208-2798
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ACCOUNT REGISTRATION FORM
- ---------------------------------------------------------------------------------------------------------------
<S> <C>
ACCOUNT INFORMATION If you need assistance in filling out this form
Fill in where applicable for the Morgan Stanley Institutional Fund, please
contact your Morgan Stanley representative or call
us toll free 1-(800)-548-7786. Please print all
items except signature, and mail to the Fund at the
address above.
- ---------------------------------------------------------------------------------------------------------------
A) REGISTRATION
1. INDIVIDUAL 1. / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
First Name Initial Last Name
2. JOINT TENANTS 2. / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
(RIGHTS OF First Name Initial Last Name
SURVIVORSHIP / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
PRESUMED UNLESS First Name Initial Last Name
TENANCY IN COMMON
IS INDICATED)
- ---------------------------------------------------------------------------------------------------------------
3. CORPORATIONS, 3. / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
TRUSTS AND OTHERS
Please call the / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
Fund for additional
documents that may / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
be required to set
up account and to
authorize transactions.
Type of / / INCORPORATED / / UNINCORPORATED / / PARTNERSHIP / / UNIFORM GIFT/TRANSFER TO MINOR
Registration: ASSOCIATION (ONLY ONE CUSTODIAN AND MINOR PERMITTED)
/ / TRUST __________________________________ / / OTHER (Specify) ______________________________
- ---------------------------------------------------------------------------------------------------------------
B) MAILING ADDRESS Street or P.O. Box / / / / / / / / / / / / / / / / / / / / / / / / / / / /
Please fill in
completely, including City / / / / / / / / / / / / / State / / / Zip / / / / / /-/ / / / / / / /
telephone number(s).
Home Business
Telephone No./ / / /-/ / / /-/ / / / / Telephone No./ / / /-/ / / /-/ / / /
/ / United States / / Resident / /Non-Resident Alien:
Citizen Alien Indicate Country of Residence _________
- ---------------------------------------------------------------------------------------------------------------
C) TAXPAYER PART 1. Enter your Taxpayer C) IMPORTANT TAX INFORMATION
IDENTIFICATION Identification Number. For most You (as a payee) are required by
NUMBER individual taxpayers, this is your law to provide us (as payer) with
If the account is in Social Security Number. your correct Taxpayer Identification
more than one name, TAXPAYER IDENTIFICATION NUMBER Number. Accounts that have a missing
CIRCLE THE NAME OF THE / / / /-/ / / / / / / / / or incorrect Taxpayer Identification
PERSON WHOSE TAXPAYER OR Number will be subject to backup
IDENTIFICATION NUMBER SOCIAL SECURITY NUMBER withholding at a 31% rate on dividends,
IS PROVIDED IN SECTION / / / /-/ / /-/ / / / / distributions and other payments.
A) ABOVE. If no name PART 2. BACKUP WITHHOLDING If you have not provided us with
is circled, the number / / Check this box if you are your correct taxpayer identification
will be considered to be NOT subject to Backup number, you may be subject to
that of the last name Withholding under the a $50 penalty imposed by the Internal
listed. For Custodian provisions of Section Revenue Service.
account of a minor 3406(a)(1)(C) of the Internal Backup withholding is not an
(Uniform Gifts/Transfers Revenue Code. additional tax; the tax liability of
to Minor Acts), give the persons subject to backup withholding
Social Security Number will be reduced by the amount of tax
of the minor. withheld. If withholding results in
an overpayment of taxes, a refund
may be obtained.
You may be notified
that you are subject to backup
withholding under Section 3406(a)(1)(C)
of the Internal Revenue Code because you
have underreported interest or dividends
or you were required to but failed to
file a return which would have included a
reportable interest or dividend payment. IF
YOU HAVE NOT BEEN SO NOTIFIED, CHECK THE
BOX IN PART 2 AT LEFT.
- ---------------------------------------------------------------------------------------------------------------
D) PORTFOLIO AND For Purchase of the following Portfolio(s):
CLASS SECTION GLOBAL EQUITY PORTFOLIO / / Class A Shares $____ / / Class B Shares $____
(Class A shares INTERNATIONAL SMALL CAP PORTFOLIO / / Class A Shares $____ / / Class B Shares $____
minimum $500,000 EUROPEAN EQUITY PORTFOLIO / / Class A Shares $____ / / Class B Shares $____
for each Portfolio LATIN AMERICAN PORTFOLIO / / Class A Shares $____ / / Class B Shares $____
and Class B shares INTERNATIONAL EQUITY PORTFOLIO / / Class A Shares $____ / / Class B Shares $____
minimum $100,000 for ASIAN EQUITY PORTFOLIO / / Class A Shares $____ / / Class B Shares $____
the Global Equity, JAPANESE EQUITY PORTFOLIO / / Class A Shares $____ / / Class B Shares $____
International Equity, Total Initial Investment $_____________
Asian Equity,
European Equity,
Japenese Equity and
Latin American Equity
Portfolios). Please
indicate Portfolio,
class and amount.
- ---------------------------------------------------------------------------------------------------------------
E) METHOD OF Payment by:
INVESTMENT / / Check (MAKE CHECK PAYABLE TO MORGAN STANLEY INSTITUTIONAL FUND, INC.--PORTFOLIO NAME)
Please
indicate
portfolio
manner of / / Exchange $____________ From________________ / / / / / / / / / / /-/ /
payment. Name of Portfolio Account No.
/ / Account previously established by: / / Phone exchange / / Wire on_____/ / / / / / / / / / / /-/ /
Date Account No. (Check
(Previously assigned by the Fund) Digit)
<PAGE>
- ---------------------------------------------------------------------------------------------------------------
F) DISTRIBUTION Income dividends and capital gains distributions (if any) to
OPTION be reinvested in additional shares unless either box below is
checked.
/ / Income dividends to be paid in cash, capital
gains distributions (if any) in shares.
/ / Income dividends and capital gains distributions
(if any) to be paid in cash.
- ---------------------------------------------------------------------------------------------------------------
G) TELEPHONE REDEMPTION / / I/we hereby authorize the Fund and its ______________________ ________________
AND EXCHANGE OPTION agents to honor any telephone requests Name of COMMERCIAL Bank Bank Account No.
Please select at time of to wire redemption proceeds to the (Not Savings Bank)
initial application if you commercial bank indicated at right and/or ________________
wish to redeem shares or mail redemption proceeds to the name and Bank ABA No.
exchange shares by telephone. address in which my/our fund account is
A SIGNATURE GUARANTEE IS registered if such requests are believed
REQUIRED IF BANK ACCOUNT IS to be authentic. _________________________________________________
NOT REGISTERED IDENTICALLY
TO YOUR FUND ACCOUNT. THE FUND AND THE FUND'S TRANSFER AGENT WILL Name(s) in which your BANK Account is Established
EMPLOY REASONABLE PROCEDURES TO CONFIRM THAT
INSTRUCTIONS COMMUNICATED BY TELEPHONE ARE _________________________________________________
TELEPHONE REQUESTS FOR GENUINE. THESE PROCEDURES INCLUDE REQUIRING Bank's Street Address
REDEMPTIONS OR EXCHANGE THE INVESTOR TO PROVIDE CERTAIN PERSONAL
WILL NOT BE HONORED UNLESS IDENTIFICATION INFORMATION AT THE TIME AN _________________________________________________
THE BOX IS CHECKED. ACCOUNT IS OPENED AND PRIOR TO EFFECTING EACH City State Zip
TRANSACTION REQUESTED BY TELEPHONE. IN ADDITION,
ALL TELEPHONE TRANSACTION REQUESTS WILL BE RECORDED
AND INVESTORS MAY BE REQUIRED TO PROVIDE ADDITIONAL
TELECOPIED WRITTEN INSTRUCTIONS OF TRANSACTION
REQUESTS. NEITHER THE FUND NOR THE TRANSFER AGENT WILL
BE RESPONSIBLE FOR ANY LOSS, LIABILITY, COST OR EXPENSE
FOR FOLLOWING INSTRUCTIONS RECEIVED BY TELEPHONE THAT
IT REASONABLY BELIEVES TO BE GENUINE.
- ---------------------------------------------------------------------------------------------------------------
H) INTERESTED PARTY
OPTION
In addition to the account _________________________________________________________________
statement sent to my/our Name
registered address, I/we _________________________________________________________________
hereby authorize the fund
to mail duplicate _________________________________________________________________
statements to the name and Address
address provided at right.
_________________________________________________________________
City State Zip Code
- ---------------------------------------------------------------------------------------------------------------
I) DEALER
INFORMATION _______________________ _______________________________ ___________
Representative Name Representative No. Branch No.
- ---------------------------------------------------------------------------------------------------------------
J) SIGNATURE OF The undersigned certify that I/we have full authority and legal
ALL HOLDERS capacity to purchase and redeem shares of the Fund and affirm that I/we
AND TAXPAYER have received a current Prospectus of the Morgan Stanley Institutional
CERTIFICATION Fund, Inc. and agree to be bound by its terms. UNDER THE PENALTIES OF
Sign Here > PERJURY, I/WE CERTIFY THAT THE INFORMATION PROVIDED IN SECTION C)
ABOVE IS TRUE, CORRECT AND COMPLETE.
(X) (X)
__________________________________ ______________________________________
Signature Date Signature Date
(X) (X)
__________________________________ ______________________________________
Signature Date Signature Date
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
(This page has been left blank intentionally.)
<PAGE>
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND OR THE DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER BY THE FUND OR THE DISTRIBUTOR TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION.
--------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
PAGE
----
Fund Expenses..................................... 2
Financial Highlights.............................. 6
Prospectus Summary................................ 14
Investment Objectives and Policies................ 18
Additional Investment Information................. 26
Investment Limitations............................ 35
Management of the Fund............................ 35
Purchase of Shares................................ 40
Redemption of Shares.............................. 44
Shareholder Services.............................. 46
Valuation of Shares............................... 46
Performance Information........................... 47
Dividends and Capital Gains Distributions......... 48
Taxes............................................. 48
Portfolio Transactions............................ 50
General Information............................... 51
Account Registration Form
</TABLE>
GLOBAL EQUITY PORTFOLIO
INTERNATIONAL EQUITY PORTFOLIO
INTERNATIONAL SMALL CAP PORTFOLIO
ASIAN EQUITY PORTFOLIO
EUROPEAN EQUITY PORTFOLIO
JAPANESE EQUITY PORTFOLIO
LATIN AMERICAN PORTFOLIO
PORTFOLIOS OF THE
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
Common Stock
($.001 PAR VALUE)
-------------
PROSPECTUS
-------------
Investment Adviser
Morgan Stanley
Asset Management Inc.
Distributor
Morgan Stanley & Co.
Incorporated
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
P.O. BOX 2798, BOSTON, MA 02208-2798
- ---------------------------------------
- ---------------------------------------
- ---------------------------------------
- ---------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
P R O S P E C T U S
----------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO
EMERGING MARKETS DEBT PORTFOLIO
PORTFOLIOS OF THE
MORGAN STANLEY INSTITUTIONAL FUND, INC.
P.O. BOX 2798, BOSTON, MASSACHUSETTS 02208-2798
FOR INFORMATION CALL 1-800-548-7786
----------------
Morgan Stanley Institutional Fund, Inc. (the "Fund") is a no-load, open-end
management investment company, or mutual fund, which offers redeemable shares in
a series of diversified and non-diversified investment portfolios
("portfolios"). The Fund currently consists of twenty-eight portfolios
representing a broad range of investment choices. The Fund is designed to
provide clients with attractive alternatives for meeting their investment needs.
This prospectus (the "Prospectus") pertains to the Class A and the Class B
shares of the Emerging Markets Portfolio and the Emerging Markets Debt Portfolio
(the "Portfolios"). On January 2, 1996, the Portfolios began offering two
classes of shares, the Class A shares and the Class B shares, except for the
Money Market, Municipal Money Market and International Small Cap Portfolios
which only offer Class A shares. All shares of the Portfolios owned prior to
January 2, 1996 were redesignated Class A shares on January 2, 1996. The Class A
and Class B shares currently offered by the Portfolios have different minimum
investment requirements and fund expenses. Shares of the portfolios are offered
with no sales charge or exchange or redemption fee (with the exception of the
International Small Cap Portfolio).
The EMERGING MARKETS PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of emerging country issuers.
The EMERGING MARKETS DEBT PORTFOLIO seeks high total return by investing
primarily in debt securities of government, government-related and corporate
issuers located in emerging countries.
Emerging markets securities are subject to special risks. See "Foreign
Investment Risk Factors."
INVESTORS SHOULD NOTE THAT EACH PORTFOLIO MAY INVEST UP TO 10% OF ITS TOTAL
ASSETS IN RESTRICTED SECURITIES AND UP TO 25% OF ITS NET ASSETS IN RESTRICTED
SECURITIES THAT ARE RULE 144A SECURITIES. SEE "ADDITIONAL INVESTMENT INFORMATION
- -- NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED
SECURITIES." INVESTMENTS IN RESTRICTED SECURITIES IN EXCESS OF 5% OF A
PORTFOLIO'S TOTAL ASSETS MAY BE CONSIDERED A SPECULATIVE ACTIVITY, MAY INVOLVE
GREATER RISK AND MAY INCREASE THE PORTFOLIO'S EXPENSES.
THE EMERGING MARKETS PORTFOLIO MAY INVEST IN EQUITY SECURITIES OF RUSSIAN
COMPANIES. RUSSIA'S SYSTEM OF SHARE REGISTRATION AND CUSTODY INVOLVES CERTAIN
RISKS OF LOSS THAT ARE NOT NORMALLY ASSOCIATED WITH INVESTMENTS IN OTHER
SECURITIES MARKETS. SEE "ADDITIONAL INVESTMENT INFORMATION -- RUSSIAN SECURITIES
TRANSACTIONS."
The Fund is designed to meet the investment needs of discerning investors
who place a premium on quality and personal service. With Morgan Stanley Asset
Management Inc. as Adviser and Administrator (the "Adviser" and the
"Administrator") and with Morgan Stanley & Co. Incorporated ("Morgan Stanley")
as Distributor, the Fund makes available to institutional investors and high net
worth individual investors a series of portfolios which benefit from the
investment expertise and commitment to excellence associated with Morgan Stanley
and its affiliates.
This Prospectus is designed to set forth concisely the information about the
Fund that a prospective investor should know before investing and it should be
retained for future reference. The Fund offers additional Portfolios which are
described in other prospectuses and under the Prospectus Summary section herein.
The Fund currently offers the following portfolios: (i) GLOBAL AND INTERNATIONAL
EQUITY -- Active Country Allocation, Asian Equity, Emerging Markets, European
Equity, Global Equity, Gold, International Equity, International Small Cap,
Japanese Equity and Latin American Portfolios; (ii) U.S. EQUITY -- Aggressive
Equity, Emerging Growth, Equity Growth, MicroCap, Small Cap Value Equity, U.S.
Real Estate and Value Equity Portfolios; (iii) BALANCED -- Balanced Portfolio;
(iv) FIXED INCOME -- Emerging Markets Debt, Fixed Income, Global Fixed Income,
High Yield, Mortgage-Backed Securities and Municipal Bond Portfolios; and (v)
MONEY MARKET -- Money Market and Municipal Money Market Portfolios. Additional
information about the Fund is contained in a "Statement of Additional
Information," dated May 1, 1996, which is incorporated herein by reference. The
Statement of Additional Information and the prospectuses pertaining to the other
portfolios of the Fund are available upon request and without charge by writing
or calling the Fund at the address and telephone number set forth above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1996.
<PAGE>
FUND EXPENSES
The following table illustrates the expenses and fees that a shareholder of
the Portfolios indicated below will incur:
<TABLE>
<CAPTION>
EMERGING
EMERGING MARKETS
MARKETS DEBT
SHAREHOLDER TRANSACTION EXPENSES PORTFOLIO PORTFOLIO
- ------------------------------------------------------------------------------ ----------- -----------
<S> <C> <C>
Maximum Sales Load Imposed on Purchases
Class A..................................................................... None None
Class B..................................................................... None None
Maximum Sales Load Imposed on Reinvested Dividends
Class A..................................................................... None None
Class B..................................................................... None None
Deferred Sales Load
Class A..................................................................... None None
Class B..................................................................... None None
Redemption Fees
Class A..................................................................... None None
Class B..................................................................... None None
Exchange Fees
Class A..................................................................... None None
Class B..................................................................... None None
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------------------------------------------------------
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<S> <C> <C>
Management Fee*
Class A..................................................................... 1.25% 1.00%
Class B..................................................................... 1.25% 1.00%
12b-1 Fees
Class A..................................................................... None None
Class B..................................................................... 0.25% 0.25%
Other Expenses
Class A..................................................................... 0.47% 0.75%
Class B..................................................................... 0.47% 0.75%
----------- -----------
Total Operating Expenses*
Class A..................................................................... 1.72% 1.75%
Class B..................................................................... 1.97% 2.00%
----------- -----------
----------- -----------
</TABLE>
- ------------------------------
*The Adviser has agreed to waive its management fees and/or to reimburse the
Portfolios, if necessary, if such fees would cause the Portfolios' total annual
operating expenses, as a percentage of average daily net assets, to exceed
1.75% for the Class A shares and 2.00% for the Class B shares. The management
fees are 1.25% for the Emerging Markets Portfolio and 1.00% for the Emerging
Markets Debt Portfolio. The Adviser reserves the right to terminate any of its
fee waivers and/or expense reimbursements at any time in its sole discretion.
For further information on Fund expenses, see "Management of the Fund."
2
<PAGE>
The purpose of the table above is to assist the investor in understanding
the various expenses that an investor in the Portfolios will bear directly or
indirectly. The Class A expenses and fees for the Portfolios are based on actual
figures for the fiscal year ended December 31, 1995. The Class B expenses and
fees for each Portfolio are based on estimates, assuming that the average daily
net assets of the Class B shares of each Portfolio will be $50,000,000. "Other
Expenses" include Board of Directors' fees and expenses, amortization of
organizational costs, filing fees, professional fees and costs for shareholder
reports. Due to the continuous nature of Rule 12b-1 fees, long term Class B
shareholders may pay more than the equivalent of the maximum front-end sales
charges otherwise permitted by the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. ("NASD").
The following example illustrates the expenses that you would pay on a
$1,000 investment assuming (1) a 5% annual rate of return and (2) redemption at
the end of each time period. As noted in the table above, the Portfolios charge
no redemption fees of any kind. The following example is based on total
operating expenses of the Portfolios after fee waivers.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Emerging Markets Portfolio
Class A.......................................................... $ 17 $ 54 $ 93 $ 203
Class B.......................................................... 20 62 106 230
Emerging Markets Debt Portfolio
Class A.......................................................... 18 55 95 206
Class B.......................................................... 20 63 108 233
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
The Fund intends to continue to comply with all state laws that restrict
investment company expenses. Currently, the most restrictive state law requires
that the aggregate annual expenses of an investment company shall not exceed two
and one-half percent (2 1/2%) of the first $30 million of average net assets,
two percent (2%) of the next $70 million of average net assets, and one and
one-half percent (1 1/2%) of the remaining net assets of such investment
company.
The Adviser has agreed to a reduction in the amounts payable to it, and to
reimburse the Portfolios, if necessary, if in any fiscal year the sum of the
Portfolio's expenses exceeds the limit set by applicable state laws.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following table provides financial highlights for the Class A shares for
the Emerging Markets and Emerging Markets Debt Portfolios for each of the
periods presented. The audited financial highlights for the Class A shares for
the fiscal year ended December 31, 1995 are part of the Fund's financial
statements which appear in the Fund's December 31, 1995 Annual Report to
Shareholders and which are included in the Fund's Statement of Additional
Information. The Portfolios' financial highlights for each of the periods
presented have been audited by Price Waterhouse LLP, whose unqualified report
thereon is also included in the Statement of Additional Information. Additional
performance information for the Class A shares of the Portfolios is included in
the Annual Report. The Annual Report and the financial statements therein, along
with the Statement of Additional Information, are available at no cost from the
Fund at the address and telephone number noted on the cover page of this
Prospectus. Financial highlights are not available for the new Class B shares
since they were not offered as of December 31, 1995. Subsequent to October 31,
1992 (the Fund's prior fiscal year end), the Fund changed its fiscal year end to
December 31. The following information should be read in conjunction with the
financial statements and notes thereto.
4
<PAGE>
EMERGING MARKETS PORTFOLIO
<TABLE>
<CAPTION>
TWO
SEPTEMBER MONTHS YEAR YEAR
25, ENDED ENDED ENDED YEAR
1992* TO DECEMBER DECEMBER DECEMBER ENDED
OCTOBER 31, 31, 31, DECEMBER
31, 1992 1992 1993 1994 31, 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD................. $ 10.00 $ 10.11 $ 10.22 $ 19.00 $ 16.30
--------- --------- --------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income/(Loss) (1)................... -- -- (0.01) (0.04) 0.08
Net Realized and Unrealized Gain/ (Loss) on
Investments....................................... 0.11 0.11 8.79 (1.69) (2.05)
--------- --------- --------- --------- ---------
Total from Investment Operations................... 0.11 0.11 8.78 (1.73) (1.97)
--------- --------- --------- --------- ---------
DISTRIBUTIONS
Net Investment Income.............................. -- -- -- -- (0.06)
Net Realized Gain.................................. -- -- -- (0.97) (1.13)
--------- --------- --------- --------- ---------
Total Distributions................................ -- -- -- (0.97) (1.19)
--------- --------- --------- --------- ---------
NET ASSET VALUE, END OF PERIOD....................... $ 10.11 $ 10.22 $ 19.00 $ 16.30 $ 13.14
--------- --------- --------- --------- ---------
TOTAL RETURN......................................... 1.10% 1.09% 85.91% (9.63)% (12.77)%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)................ $28,806 $74,219 $735,352 $929,638 $876,591
Ratio of Expenses to Average Net
Assets (1)(2)....................................... 1.75%** 1.75%** 1.75% 1.75% 1.72%
Ratio of Net Investment Gain/(Loss) to Average Net
Assets (1)(2)....................................... (0.53)%** (0.33)%** (0.06)% (0.26)% 0.60%
Portfolio Turnover Rate.............................. 0% 2% 52% 32% 54%
- ------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net investment income........ $ 0.02 $ 0.00 $ 0.01 N/A N/A
Ratios before expense limitation:
Expenses to Average Net Assets.................... 4.82%** 2.48%** 1.79% N/A N/A
Net Investment Gain/(Loss) to Average
Net Assets..................................... (3.60)%** (1.06)%** (0.10)% N/A N/A
</TABLE>
(2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled
to receive a management fee calculated at an annual rate of 1.25% of the
average daily net assets of the Emerging Markets Portfolio. The Adviser has
agreed to waive a portion of this fee and/or reimburse expenses of the
Portfolio to the extent that the total operating expenses of the Portfolio
exceed 1.75% of the average daily net assets of the Class A shares and 2.00%
of the average net assets of the Class B shares. The Adviser did not waive
fees or reimburse expenses for the years ended December 31, 1994 and 1995.
In the period ended October 31, 1992, the two month period ended December
31, 1992 and the year ended December 31, 1993, the Adviser waived advisory
fees and/or reimbursed expenses totalling $58,000, $50,000 and $122,000,
respectively, for the Emerging Markets Portfolio.
* Commencement of Operations.
** Annualized.
5
<PAGE>
EMERGING MARKETS DEBT PORTFOLIO
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 1, 1994* YEAR ENDED
TO DECEMBER 31, DECEMBER 31,
1994 1995
----------------- -------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD............................................ $ 10.00 $ 8.59
-------- -------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income......................................................... 0.50 1.36
Net Realized and Unrealized Gain/(Loss) on Investments........................ (1.91) 0.91
-------- -------------
Total from Investment Operations.............................................. (1.41) 2.27
-------- -------------
DISTRIBUTIONS
Net Investment Income......................................................... -- (1.86)
Net Realized Gain............................................................. (0.41)
-------- -------------
Total Distributions......................................................... -- (2.27)
-------- -------------
NET ASSET VALUE, END OF PERIOD.................................................. $ 8.59 $ 8.59
-------- -------------
-------- -------------
TOTAL RETURN.................................................................... (14.10)% 28.23%
-------- -------------
-------- -------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)........................................... $ 144,949 $ 181,878
Ratio of Expenses to Average Net Assets......................................... 1.49%** 1.75%
Ratio of Net Investment Income to Average Net Assets............................ 9.97%** 14.70%
Portfolio Turnover Rate......................................................... 273% 406%
- ------------------------
</TABLE>
* Commencement of Operations.
** Annualized.
6
<PAGE>
PROSPECTUS SUMMARY
THE FUND
The Fund consists of twenty-eight portfolios, offering institutional
investors and high net worth individual investors a broad range of investment
choices coupled with the advantages of a no-load mutual fund with Morgan Stanley
and its affiliates providing customized services as Adviser, Administrator and
Distributor. Each portfolio offers Class A shares and, except for the
International Small Cap, Money Market and Municipal Money Market Portfolios,
also offers Class B shares. Each portfolio has its own investment objective and
policies designed to meet its specific goals. The investment objective of each
Portfolio described in this Prospectus is as follows:
-The EMERGING MARKETS PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of emerging country issuers.
-The EMERGING MARKETS DEBT PORTFOLIO seeks high total return by investing
primarily in debt securities of government, government-related and
corporate issuers located in emerging countries. The other portfolios of
the Fund are described in other prospectuses which may be obtained from the
Fund at the address and telephone number noted on the cover page of this
Prospectus. The objectives of these other portfolios are listed below:
GLOBAL AND INTERNATIONAL EQUITY:
-The ACTIVE COUNTRY ALLOCATION PORTFOLIO seeks long-term capital
appreciation by investing in accordance with country weightings determined
by the Adviser in equity securities of non-U.S. issuers which, in the
aggregate, replicate broad country indices.
-The ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Asian issuers.
-The CHINA GROWTH PORTFOLIO seeks to provide long-term capital appreciation
by investing primarily in the equity securities of issuers in The People's
Republic of China, Hong Kong and Taiwan.
-The EUROPEAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of European issuers.
-The GLOBAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of issuers throughout the world,
including U.S. issuers.
-The GOLD PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of foreign and domestic issuers engaged in
gold-related activities.
-The INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers.
-The INTERNATIONAL MAGNUM PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers in accordance
with EAFE country (as defined in "Investment Objectives and Policies"
below) weightings determined by the Adviser.
-The INTERNATIONAL SMALL CAP PORTFOLIO seeks long-term capital appreciation
by investing primarily in equity securities of non-U.S. issuers with equity
market capitalizations of under $1 billion.
7
<PAGE>
-The JAPANESE EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Japanese issuers.
-The LATIN AMERICAN PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Latin American issuers and debt
securities issued or guaranteed by Latin American governments or
governmental entities.
U.S. EQUITY:
-The AGGRESSIVE EQUITY PORTFOLIO seeks capital appreciation by investing
primarily in corporate equity and equity-linked securities.
-The EMERGING GROWTH PORTFOLIO seeks long-term capital appreciation by
investing primarily in growth-oriented equity securities of small- to
medium-sized corporations.
-The EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation by
investing in growth-oriented equity securities of medium and large
capitalization companies.
-The MICROCAP PORTFOLIO seeks long-term capital appreciation by investing
primarily in growth-oriented equity securities of small corporations.
-The SMALL CAP VALUE EQUITY PORTFOLIO seeks long-term total return by
investing in undervalued equity securities of small- to medium-sized
companies.
-The U.S. REAL ESTATE PORTFOLIO seeks to provide above average current
income and long-term capital appreciation by investing primarily in equity
securities of companies in the U.S. real estate industry, including real
estate investment trusts.
-The VALUE EQUITY PORTFOLIO seeks high total return by investing in equity
securities which the Adviser believes to be undervalued relative to the
stock market in general at the time of purchase.
BALANCED:
-The BALANCED PORTFOLIO seeks high total return while preserving capital by
investing in a combination of undervalued equity securities and fixed
income securities.
FIXED INCOME:
-The FIXED INCOME PORTFOLIO seeks to produce a high total return consistent
with the preservation of capital by investing in a diversified portfolio of
fixed income securities.
-The GLOBAL FIXED INCOME PORTFOLIO seeks to produce an attractive real rate
of return while preserving capital by investing in fixed income securities
of issuers throughout the world, including U.S. issuers.
-The HIGH YIELD PORTFOLIO seeks to maximize total return by investing in a
diversified portfolio of high yield fixed income securities that offer a
yield above that generally available on debt securities in the three
highest rating categories of the recognized rating services.
-The MORTGAGE-BACKED SECURITIES PORTFOLIO seeks to produce as high a level
of current income as is consistent with the preservation of capital by
investing primarily in a variety of investment-grade mortgage-backed
securities.
8
<PAGE>
-The MUNICIPAL BOND PORTFOLIO seeks to produce a high level of current
income consistent with preservation of principal through investment
primarily in municipal obligations, the interest on which is exempt from
federal income tax.
MONEY MARKET:
-The MONEY MARKET PORTFOLIO seeks to maximize current income and preserve
capital while maintaining high levels of liquidity through investing in
high quality money market instruments with remaining maturities of one year
or less.
-The MUNICIPAL MONEY MARKET PORTFOLIO seeks to maximize current tax-exempt
income and preserve capital while maintaining high levels of liquidity
through investing in high quality money market instruments with remaining
maturities of one year or less which are exempt from federal income tax.
INVESTMENT MANAGEMENT
Morgan Stanley Asset Management Inc., a wholly owned subsidiary of Morgan
Stanley Group Inc., which, together with its affiliated asset management
companies, at December 31, 1995 had approximately $57.4 billion in assets under
management as an investment manager or as a fiduciary adviser, acts as
investment adviser to the Fund and each of its portfolios. See "Management of
the Fund -- Investment Adviser" and "Management of the Fund -- Administrator."
HOW TO INVEST
Class A shares of each Portfolio are offered directly to investors at net
asset value with no sales commission or 12b-1 charges. Class B shares of each
Portfolio are offered at net asset value with no sales commission, but with a
12b-1 fee, which is accrued daily and paid quarterly, equal to 0.25% of the
Class B shares' average daily net assets on an annualized basis. Share purchases
may be made by sending investments directly to the Fund or through the
Distributor. Shares in a Portfolio account opened prior to January 2, 1996
(each, a "Pre-1996 Account") were designated Class A shares on January 2, 1996.
For a Portfolio account opened on or after January 2, 1996 (a "New Account"),
the minimum initial investment is $500,000 for Class A shares and $100,000 for
Class B shares. Certain exceptions to the foregoing minimums apply to (1) shares
in a Pre-1996 Account with a value of $100,000 or more on March 1, 1996 (a
"Grandfathered Class A Account"); (2) Portfolio accounts held by officers of the
Adviser and its affiliates; and (3) certain advisory or asset allocation
accounts, such as Total Funds Management accounts, managed by Morgan Stanley or
its affiliates, including the Adviser ("Managed Accounts"). The Adviser reserves
the right in its sole discretion to determine which of such advisory or asset
allocation accounts shall be Managed Accounts. For information regarding Managed
Accounts please contact your Morgan Stanley account representative or the Fund
at the telephone number provided on the cover of this Prospectus. Shares in a
Pre-1996 Account with a value of less than $100,000 on March 1, 1996 (a
"Grandfathered Class B Account") converted to Class B shares on March 1, 1996.
The minimum investment levels may be waived at the discretion of the Adviser for
(i) certain employees and customers of Morgan Stanley or its affiliates and
certain trust departments, brokers, dealers, agents, financial planers,
financial services firms or investment advisers that have entered into an
agreement with Morgan Stanley or its affiliates; and (ii) retirement and
deferred compensation plans and trusts, used to fund such plans, including, but
not limited to, those defined in Section 401(a), 403(b) or 457 of the Internal
Revenue Code of 1986, as amended, and "rabbi trusts". See "Purchase of Shares --
Minimum Investment and Account Sizes; Conversion from Class A to Class B
Shares."
9
<PAGE>
The minimum subsequent investment for each Portfolio account is $1,000
(except for automatic reinvestment of dividends and capital gains distributions
for which there is no minimum). Such subsequent investments will be applied to
purchase additional shares in the same class held by a shareholder in a
Portfolio account. See "Purchase of Shares -- Additional Investments."
HOW TO REDEEM
Class A shares or Class B shares of each Portfolio may be redeemed at any
time, without cost, at the net asset value per share of shares of the applicable
class next determined after receipt of the redemption request. The redemption
price may be more or less than the purchase price. Certain redemptions may cause
involuntary redemption or conversion. Class A or Class B shares held in New
Accounts are subject to involuntary redemption if shareholder redemption(s) of
such shares reduces the value of such account to less than $100,000 for a
continuous 60-day period. Involuntary redemption does not apply to Managed
Accounts, Grandfathered Class A Accounts and Grandfathered Class B Accounts,
regardless of the value of such accounts. Class A shares in a New Account will
convert to Class B shares if shareholder redemption(s) of such shares reduces
the value of such account to less than $500,000 for a continuous 60-day period.
Class B shares in a New Account will convert to Class A shares if shareholder
purchases of additional Class B shares or market activity cause the value of the
Class B shares in the New Account to increase to $500,000 or more. See "Purchase
of Shares -- Minimum Account Sizes and Involuntary Redemption of Shares" and
"Redemption of Shares."
RISK FACTORS
Investing in emerging country securities involves certain considerations not
typically associated with investing in securities of U.S. companies, including
(1) restrictions on foreign investment and on repatriation of capital invested
in emerging countries, (2) currency fluctuations, (3) the cost of converting
foreign currency into U.S. dollars, (4) potential price volatility and lesser
liquidity of shares traded on emerging country securities markets or lack of a
secondary trading market for such securities and (5) political and economic
risks, including the risk of nationalization or expropriation of assets and the
risk of war. In addition, accounting, auditing, financial and other reporting
standards in emerging countries are not equivalent to U.S. standards and
therefore, disclosure of certain material information may not be made and less
information may be available to investors investing in emerging countries than
in the U.S. There is also generally less governmental regulation of the
securities industry in emerging countries than in the United States. Moreover,
it may be more difficult to obtain a judgment in a court outside the U.S. See
"Investment Objectives and Policies" and "Additional Investment Information." In
addition, each Portfolio may invest in repurchase agreements, lend its portfolio
securities and purchase securities on a when-issued basis. Each Portfolio may
invest in foreign currency futures contracts and options to hedge currency risk
associated with investment in non-U.S. dollar denominated securities. Each of
these investment strategies involves specific risks which are described under
"Investment Objectives and Policies" and "Additional Investment Information"
herein and under "Investment Objectives and Policies" in the Statement of
Additional Information.
The Emerging Markets Portfolio may invest in equity securities of Russian
companies. The registration, clearing and settlement of securities transactions
in Russia are subject to significant risks not normally associated with
securities transactions in the United States and other more developed markets.
See "Additional Investment Information -- Russian Securities Transactions."
10
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of each Portfolio is described below, together with
the policies the Fund employs in its efforts to achieve these objectives. There
is no assurance that each Portfolio will attain its objective. Each Portfolio's
investment objective is a fundamental policy which may not be changed without
the approval of a majority of the Portfolio's outstanding voting securities. The
investment policies described below are not fundamental policies and may be
changed without shareholder approval.
THE EMERGING MARKETS PORTFOLIO
The investment objective of the Portfolio is to provide long-term capital
appreciation by investing primarily in equity securities of emerging country
issuers. With respect to the Portfolio, equity securities include common and
preferred stocks, convertible securities, rights and warrants to purchase common
stocks. Under normal conditions, at least 65% of the Portfolio's total assets
will be invested in emerging country equity securities. As used in this
Prospectus, the term "emerging country" applies to any country which, in the
opinion of the Adviser, is generally considered to be an emerging or developing
country by the international financial community, which includes the
International Bank for Reconstruction and Development (more commonly known as
the World Bank) and the International Finance Corporation. There are currently
over 130 countries which, in the opinion of the Adviser, are generally
considered to be emerging or developing countries by the international financial
community, approximately 40 of which currently have stock markets. These
countries generally include every nation in the world except the United States,
Canada, Japan, Australia, New Zealand and most nations located in Western
Europe. Currently, investing in many emerging countries is not feasible or may
involve unacceptable political risks. The Portfolio will focus its investments
on those emerging market countries in which it believes the economies are
developing strongly and in which the markets are becoming more sophisticated.
The Portfolio intends to invest primarily in some or all of the following
countries:
<TABLE>
<S> <C> <C> <C>
Argentina Botswana Brazil Chile
China Colombia Greece Hong Kong
Hungary India Indonesia Jamaica
Jordan Kenya Malaysia Mexico
Nigeria Pakistan Peru Philippines
Poland Portugal Russia South Africa
South Korea Sri Lanka Taiwan Thailand
Turkey Venezuela Zimbabwe
</TABLE>
As markets in other countries develop, the Portfolio expects to expand and
further diversify the emerging countries in which it invests. The Portfolio does
not intend to invest in any security in a country where the currency is not
freely convertible to U.S. dollars, unless the Portfolio has obtained the
necessary governmental licensing to convert such currency or other appropriately
licensed or sanctioned contractual guarantees to protect such investment against
loss of that currency's external value, or the Portfolio has a reasonable
expectation at the time the investment is made that such governmental licensing
or other appropriately licensed or sanctioned guarantees would be obtained or
that the currency in which the security is quoted would be freely convertible at
the time of any proposed sale of the security by the Portfolio.
An emerging country security is one issued by a company that, in the opinion
of the Adviser, has one or more of the following characteristics: (i) its
principal securities trading market is in an emerging country,
11
<PAGE>
(ii) alone, or on a consolidated basis, the company derives 50% or more of its
annual revenue from either goods produced, sales made or services performed in
emerging countries; or (iii) the company is organized under the laws of, and has
a principal office in, an emerging country. The Adviser will base determinations
as to eligibility on publicly available information and inquiries made to the
companies. (See "Foreign Investment Risk Factors" for a discussion of the nature
of information publicly available for non-U.S. companies.)
To the extent that the Portfolio's assets are not invested in emerging
country equity securities, the remainder of the assets may be invested in (i)
debt securities denominated in the currency of an emerging country or issued or
guaranteed by an emerging country company or the government of an emerging
country, (ii) equity or debt securities of corporate or governmental issuers
located in industrialized countries, and (iii) short-term and medium-term debt
securities of the type described below under "Temporary Instruments." The
Portfolio's assets may be invested in debt securities when the Portfolio
believes that, based upon factors such as relative interest rate levels and
foreign exchange rates, such debt securities offer opportunities for long-term
capital appreciation. It is likely that many of the debt securities in which the
Portfolio will invest will be unrated, and whether or not rated, such securities
may have speculative characteristics. When deemed appropriate by the Adviser,
the Portfolio may invest up to 10% of its total assets (measured at the time of
the investment) in lower quality debt securities. Lower quality debt securities,
also known as "junk bonds," are often considered to be speculative and involve
greater risk of default or price changes due to changes in the issuer's
creditworthiness. As of the date of this prospectus, less than 5% of the
Portfolio's total assets were invested in junk bonds. The market prices of these
securities may fluctuate more than those of higher quality securities and may
decline significantly in periods of general economic difficulty, which may
follow periods of rising interest rates. Securities in the lowest quality
category may present the risk of default, or may be in default. For temporary
defensive purposes, the Portfolio may invest less than 65% of its total assets
in emerging country equity securities, in which case the Portfolio may invest in
other equity securities or may invest in debt securities of the kind described
under "Temporary Investments" below.
The Portfolio may invest indirectly in securities of emerging country
issuers through sponsored or unsponsored American Depositary Receipts ("ADRs").
ADRs may not necessarily be denominated in the same currency as the underlying
securities into which they may be converted. In addition, the issuers of the
stock of unsponsored ADRs are not obligated to disclose material information in
the U.S. and, therefore, there may not be a correlation between such information
and the market value of the ADR.
THE EMERGING MARKETS DEBT PORTFOLIO
The investment objective of the Portfolio is to seek high total return. In
seeking to achieve this objective, the Portfolio will seek to invest at least
65% of its total assets in debt securities of government and government-related
issuers located in emerging countries (including participations in loans between
governments and financial institutions), and of entities organized to
restructure outstanding debt of such issuers. In addition, the Portfolio may
invest up to 35% of its total assets in debt securities of corporate issuers
located in or organized under the laws of emerging countries. See "The Emerging
Markets Portfolio" above for a definition of emerging countries.
The Adviser intends to invest the Portfolio's assets in emerging country
debt securities that provide a high level of current income, while at the same
time holding the potential for capital appreciation if the perceived
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creditworthiness of the issuer improves due to improving economic, financial,
political, social or other conditions in the country in which the issuer is
located. Currently, investing in many emerging country securities is not
feasible or may involve unacceptable political risks. Initially, the Portfolio
expects that its investments in emerging country debt securities will be made
primarily in some or all of the following emerging countries:
<TABLE>
<S> <C> <C>
Algeria India Philippines
Argentina Indonesia Poland
Brazil Ivory Coast Portugal
Bulgaria Jamaica Russia
Chile Jordan Slovakia
China Malaysia South Africa
Colombia Mexico Thailand
Costa Rica Morocco Trinidad & Tobago
Czech Republic Nicaragua Tunisia
Dominican Republic Nigeria Turkey
Ecuador Pakistan Uruguay
Egypt Panama Venezuela
Greece Paraguay Zaire
Hungary Peru
</TABLE>
In selecting emerging country debt securities for investment by the Investment
Fund, the Adviser will apply a market risk analysis contemplating assessment of
factors such as liquidity, volatility, tax implications, interest rate
sensitivity, counterparty risks and technical market considerations. Currently,
investing in many emerging country securities is not feasible or may involve
unacceptable political risks. As opportunities to invest in debt securities in
other countries develop, the Portfolio expects to expand and further diversify
the emerging countries in which it invests. While the Portfolio generally is not
restricted in the portion of its assets which may be invested in a single
country or region, it is anticipated that, under normal conditions, the
Portfolio's assets will be invested in issuers in at least three countries.
The Portfolio's investments in government, government-related and
restructured debt securities will consist of (i) debt securities or obligations
issued or guaranteed by governments, governmental agencies or instrumentalities
and political subdivisions located in emerging countries (including
participations in loans between governments and financial institutions), (ii)
debt securities or obligations issued by government owned, controlled or
sponsored entities located in emerging countries, and (iii) interests in issuers
organized and operated for the purpose of restructuring the investment
characteristics of instruments issued by any of the entities described above.
Such type of restructuring involves the deposit with or purchase by an entity of
specific instruments and the issuance by that entity of one or more classes of
securities backed by, or representing interests in, the underlying instruments.
Certain issuers of such structured securities may be deemed to be "investment
companies" as defined in the Investment Company Act of 1940 (the "1940 Act"). As
a result, the Portfolio's investment in such securities may be limited by
certain investment restrictions contained in the 1940 Act. See "Additional
Investment Information -- Structured Securities."
The Portfolio's investments in debt securities of corporate issuers in
emerging countries may include debt securities or obligations issued (i) by
banks located in emerging countries or by branches of emerging country banks
located outside the country or (ii) by companies organized under the laws of an
emerging country.
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Determinations as to eligibility will be made by the Adviser based on publicly
available information and inquiries made to the issuer. (See "Foreign Investment
Risk Factors" for a discussion of the nature of information publicly available
for non-U.S. issuers.) The Portfolio may also invest in certain debt obligations
customarily referred to as "Brady Bonds," which are created through the exchange
of existing commercial bank loans to foreign entities for new obligations in
connection with debt restructurings under a plan introduced by former U.S.
Secretary of the Treasury Nicholas F. Brady. See "Investment Objectives and
Policies -- Emerging Country Equity and Debt Securities" in the Statement of
Additional Information for further information about Brady Bonds.
Emerging country debt securities held by the Portfolio will take the form of
bonds, notes, bills, debentures, convertible securities, warrants, bank debt
obligations, short-term paper, mortgage and other asset-backed securities, loan
participations, loan assignments and interests issued by entities organized and
operated for the purpose of restructuring the investment characteristics of
instruments issued by emerging country issuers. U.S. dollar-denominated emerging
country debt securities held by the Portfolio will generally be listed but not
traded on a securities exchange, and non-U.S. dollar-denominated securities held
by the Portfolio may or may not be listed or traded on a securities exchange.
Investments in emerging country debt securities entail special investment risks.
See "Additional Investment Information -- Foreign Investment Risk Factors." The
Portfolio will be subject to no restrictions on the maturities of the emerging
country debt securities it holds; those maturities may range from overnight to
30 years.
The Portfolio is not restricted in the portion of its assets which may be
invested in securities denominated in a particular currency and a substantial
portion of the Portfolio's assets may be invested in non-U.S. dollar-denominated
securities. The portion of the Portfolio's assets invested in securities
denominated in currencies other than the U.S. dollar will vary depending on
market conditions. Although the Portfolio is permitted to engage in a wide
variety of investment practices designed to hedge against currency exchange rate
risks with respect to its holdings of non-U.S. dollar-denominated debt
securities, the Portfolio may be limited in its ability to hedge against these
risks. See "Additional Investment Information -- Forward Foreign Currency
Exchange Contracts" and "Foreign Currency Futures Contracts and Options" in the
Statement of Additional Information.
In selecting particular emerging country debt securities for investment by
the Portfolio, the Adviser will apply a market risk analysis contemplating
assessment of factors such as liquidity, volatility, tax implications, interest
rate sensitivity, counterparty risks and technical market considerations.
Emerging country debt securities in which the Portfolio may invest will be
subject to high risk and will not be required to meet a minimum rating standard
and may not be rated for creditworthiness by any internationally recognized
credit rating organization. The Portfolio's investments are expected to be rated
in the lower and lowest rating categories of internationally recognized credit
rating organizations or are expected to be unrated securities of comparable
quality. These types of debt obligations are predominantly speculative with
respect to the capacity to pay interest and repay principal in accordance with
their terms and generally involve a greater risk of default and of volatility in
price than securities in higher rating categories. Ratings of a non-U.S. debt
instrument, to the extent that those ratings are undertaken, are related to
evaluations of the country in which the issuer of the instrument is located.
Ratings generally take into account the currency in which a non-U.S. debt
instrument is denominated. Instruments issued by a foreign government in other
than the local currency, for example, typically have a lower rating than local
currency instruments due to the existence of an additional risk that the
government will be unable to obtain the required foreign currency to service its
foreign currency-denominated debt. In general, the
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<PAGE>
ratings of debt securities or obligations issued by a non-U.S. public or private
entity will not be higher than the rating of the currency or the foreign
currency debt of the central government of the country in which the issuer is
located, regardless of the intrinsic creditworthiness of the issuer.
The Portfolio is authorized to borrow up to 33 1/3% of its total assets
(including the amount borrowed), less all liabilities and indebtedness other
than the borrowing, for investment purposes to increase the opportunity for
greater return and for payment of dividends. Such borrowings would constitute
leverage, which is a speculative characteristic. Leveraging will magnify
declines as well as increases in the net asset value of the Portfolio's shares
and increases in the yield on the Portfolio's investments. See "Additional
Investment Information -- Borrowing and Other Forms of Leverage."
The Portfolio may also invest in zero coupon, pay-in-kind or deferred
payment securities and in securities that may be collateralized by zero coupon
securities (such as Brady Bonds). Zero coupon securities are securities that are
sold at a discount to par value and on which interest payments are not made
during the life of the security. Upon maturity, the holder is entitled to
receive the par value of the security. While interest payments are not made on
such securities, holders of such securities are deemed to have received annually
"phantom income." Because the Portfolio will distribute its "phantom income" to
shareholders, to the extent that shareholders elect to receive dividends in cash
rather than reinvesting such dividends in additional shares, the Portfolio will
have fewer assets with which to purchase income producing securities. The
Portfolio accrues income with respect to these securities prior to the receipt
of cash payments. Pay-in-kind securities are securities that have interest
payable by delivery of additional securities. Upon maturity, the holder is
entitled to receive the aggregate par value of the securities. Deferred payment
securities are securities that remain zero coupon securities until a
predetermined date, at which time the stated coupon rate becomes effective and
interest becomes payable at regular intervals. Zero coupon, pay-in-kind and
deferred payment securities may be subject to greater fluctuation in value and
lesser liquidity in the event of adverse market conditions than comparably rated
securities paying cash interest at regular interest payment periods.
The Portfolio may also invest up to 5% of its total assets in
mortgage-backed securities and in other asset-backed securities issued by
non-governmental entities, such as banks and other financial institutions.
Mortgage-backed securities include mortgage pass-through securities and
collateralized mortgage obligations. Asset-backed securities are collateralized
by such assets as automobile or credit card receivables and are securitized
either in a pass-through structure or in a pay-through structure similar to a
CMO.
The Portfolio's investments in government, government-related and
restructured debt instruments are subject to special risks, including the
inability or unwillingness to repay principal and interest, requests to
reschedule or restructure outstanding debt and requests to extend additional
loan amounts. The Portfolio may have limited recourse in the event of default on
such debt instruments. The Portfolio may invest in loans, assignments of loans
and participations in loans. See "Additional Investment Information."
ADDITIONAL INVESTMENT INFORMATION
AMERICAN DEPOSITARY RECEIPTS. The Portfolios may on occasion invest in
American Depositary Receipts ("ADRs"). ADRs are securities, typically issued by
a U.S. financial institution (a "depositary"), that evidence ownership interests
in a security or a pool of securities issued by a foreign issuer (the
"underlying issuer") and deposited with the depositary. ADRs include American
Depositary Shares and New York Shares and may be
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<PAGE>
"sponsored" or "unsponsored." Sponsored ADRs are established jointly by a
depositary and the underlying issuer, whereas unsponsored ADRs may be
established by a depositary without participation by the underlying issuer.
Holders of an unsponsored ADR generally bear all the costs associated with
establishing the unsponsored ADR. The depositary of an unsponsored ADR is under
no obligation to distribute shareholder communications received from the
underlying issuer or to pass through to the holders of the unsponsored ADR
voting rights with respect to the deposited securities or pool of securities.
The Portfolios may invest in sponsored and unsponsored ADRs.
BORROWING AND OTHER FORMS OF LEVERAGE. The Emerging Markets Debt Portfolio
is authorized to borrow money from banks and other entities in an amount equal
to up to 33 1/3% of the Portfolio's total assets (including the amount borrowed)
less all liabilities and indebtedness other than the borrowing, and may use the
proceeds of the borrowing for investment purposes or to pay dividends.
Borrowings create leverage, which is a speculative characteristic. Although the
Portfolio is authorized to borrow, it will do so only when the Adviser believes
that borrowing will benefit the Portfolio after taking into account
considerations such as the costs of the borrowing and the likely investment
returns on the securities purchased with borrowed monies. Borrowing by the
Portfolio will create the opportunity for increased net income but, at the same
time, will involve special risk considerations. Leveraging resulting from
borrowing will magnify declines as well as increases in the Portfolio's net
asset value per share and net yield. The Portfolio expects that all of its
borrowing will be made on a secured basis. The Portfolio's Custodian will either
segregate the assets securing the borrowing for the benefit of the lenders or
arrangements will be made with a suitable sub-custodian. If assets used to
secure the borrowing decrease in value, the Portfolio may be required to pledge
additional collateral to the lender in the form of cash or securities to avoid
liquidation of those assets.
FOREIGN INVESTMENT. Investment in obligations of foreign issuers and in
foreign branches of domestic banks involves somewhat different investment risks
than those affecting obligations of U.S. issuers. There may be limited publicly
available information with respect to foreign issuers, and foreign issuers are
not generally subject to uniform accounting, auditing and financial standards
and requirements comparable to those applicable to U.S. companies. There may
also be less government supervision and regulation of foreign securities
exchanges, brokers and listed companies than in the U.S. Many foreign securities
markets have substantially less volume than U.S. national securities exchanges,
and securities of some foreign issuers are less liquid and more volatile than
securities of comparable domestic issuers. Brokerage commissions and other
transaction costs on foreign securities exchanges are generally higher than in
the U.S. Dividends and interest paid by foreign issuers may be subject to
withholding and other foreign taxes, which may decrease the net return on
foreign investments as compared to dividends and interest paid by U.S.
companies. Additional risks include future political and economic developments,
the possibility that a foreign jurisdiction might impose or change withholding
taxes on income payable with respect to foreign securities, and the possible
adoption of foreign governmental restrictions such as exchange controls.
Prior governmental approval for foreign investments may be required under
certain circumstances in some emerging countries, and the extent of foreign
investment in certain debt securities and domestic companies may be subject to
limitation in other emerging countries. Foreign ownership limitations also may
be imposed by the charters of individual companies in emerging countries to
prevent, among other concerns, violation of foreign investment limitations.
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Repatriation of investment income, capital and the proceeds of sales by
foreign investors may require governmental registration and/or approval in some
emerging countries. The Portfolios could be adversely affected by delays in, or
a refusal to grant, any required governmental registration or approval for such
repatriation. Any investment subject to such repatriation controls will be
considered illiquid if it appears reasonably likely that this process will take
more than seven days.
The economies of individual emerging countries may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross domestic
product, rate of inflation, currency depreciation, capital reinvestment,
resource self-sufficiency and balance of payments position. Further, the
economies of developing countries generally are heavily dependent upon
international trade and, accordingly, have been, and may continue to be,
adversely affected by trade barriers, exchange controls, managed adjustments in
relative currency values and other protectionist measures imposed or negotiated
by the countries with which they trade. These economies also have been, and may
continue to be, adversely affected by economic conditions in the countries with
which they trade.
With respect to any emerging country, there is the possibility of
nationalization, expropriation or confiscatory taxation, political changes,
government regulation, social instability or diplomatic developments (including
war) which could affect adversely the economies of such countries or the value
of each Portfolio's investments in those countries. In addition, it may be
difficult to obtain and enforce a judgment in a court outside of the U.S.
Investments in securities of foreign issuers are frequently denominated in
foreign currencies, and because each Portfolio may temporarily hold uninvested
reserves in bank deposits in foreign currencies, the value of each Portfolio's
assets, as measured in U.S. dollars, may be affected favorably or unfavorably by
changes in currency rates and in exchange control regulations and the Portfolios
may incur costs in connection with conversions between various currencies.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The Portfolios may enter into
forward foreign currency exchange contracts that provide for the purchase or
sale of an amount of a specified foreign currency at a future date. Purposes for
which such contracts may be used include protecting against a decline in a
foreign currency against the U.S. dollar between the trade date and settlement
date when the Portfolio purchases or sells securities, locking in the U.S.
dollar value of dividends declared on securities held by a Portfolio and
generally protecting the U.S. dollar value of securities held by the Portfolio
against exchange rate fluctuation. Such contracts may also be used as a
protective measure against the effects of fluctuating rates of currency exchange
and exchange control regulations. While such forward contracts may limit losses
to the Portfolio as a result of exchange rate fluctuation, they will also limit
any gains that may otherwise have been realized. See "Investment Objectives and
Policies -- Forward Foreign Currency Exchange Contracts" in the Statement of
Additional Information.
As another means of reducing the risks associated with investing in
securities denominated in foreign currencies, the Portfolios may enter into
contracts for the future acquisition or delivery of foreign currencies and may
purchase foreign currency options. These investment techniques are designed
primarily to hedge against anticipated future changes in currency prices, that
otherwise might adversely affect the value of the Portfolio's portfolio
securities. A Portfolio will incur brokerage fees when it purchases or sells
futures contracts or options, and it will be required to maintain margin
deposits. As set forth below, futures contracts and options entail risks, but
the Adviser believes that use of such contracts and options may benefit the
Portfolio by diminishing currency
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risks. A Portfolio will not enter into any futures contract or option if
immediately thereafter the value of all the foreign currencies underlying its
futures contracts and foreign currency options would exceed 10% of the value of
its total assets. In addition, a Portfolio may enter into a futures contract
only if immediately thereafter not more than 5% of its total assets are required
as deposit to secure obligations under such contracts.
The primary risks associated with the use of futures and options are (i)
failure to predict accurately the direction of currency movements and (ii)
market risks (e.g., lack of liquidity or lack of correlation between the change
in value of underlying currencies and that of the value of the Portfolio's
futures or options contracts). The risk that a Portfolio will be unable to close
out a futures position or options contract will be minimized by the Portfolio
only entering into futures contracts or options transactions for which there
appears to be a liquid secondary market. For more detailed information about
futures transactions, see "Investment Objectives and Policies" in the Statement
of Additional Information.
The Emerging Markets Debt Portfolio may attempt to accomplish objectives
similar to those described above with respect to forward and futures contracts
for currency by means of purchasing put or call options on foreign currencies on
exchanges. A put option gives the Portfolio the right to sell a currency at the
exercise price until the expiration of the option. A call option gives the
Portfolio the right to purchase a currency at the exercise price until the
expiration of the option.
The Portfolio's Custodian will place cash, U.S. government securities or
high-grade debt securities into a segregated account of a Portfolio in an amount
equal to the value of such Portfolio's total assets committed to the
consummation of forward foreign currency exchange contracts. If the value of the
securities placed in the segregated account declines, additional cash or
securities will be placed in the account on a daily basis so that the value of
the account will be at least equal to the amount of such Portfolio's commitments
with respect to such contracts. See "Investment Objectives and Policies --
Forward Currency Exchange Contracts" in the Statement of Additional Information.
INVESTMENT FUNDS. Some emerging countries have laws and regulations that
currently preclude direct foreign investment in the securities of their
companies. However, indirect foreign investment in the securities of companies
listed and traded on the stock exchanges in these countries is permitted by
certain emerging countries through investment funds which have been specifically
authorized. The Portfolios may invest in these investment funds subject to the
provisions of the 1940 Act, and other applicable laws as discussed below under
"Investment Restrictions." If a Portfolio invests in such investment funds, the
Portfolio's shareholders will bear not only their proportionate share of the
expenses of the Portfolio (including operating expenses and the fees of the
Adviser), but also will indirectly bear similar expenses of the underlying
investment funds.
Certain of the investment funds referred to in the preceding paragraph are
advised by the Adviser. These Portfolios may, to the extent permitted under the
1940 Act and other applicable law, invest in these investment funds. If a
Portfolio does elect to make an investment in such an investment fund, it will
only purchase the securities of such investment fund in the secondary market.
LOAN PARTICIPATIONS AND ASSIGNMENTS. The Emerging Markets and Emerging
Markets Debt Portfolios may invest in fixed rate and floating rate loans
("Loans") arranged through private negotiations between an issuer of sovereign
debt obligations and one or more financial institutions ("Lenders"). The
Portfolio's investments in Loans are expected in most instances to be in the
form of participation in Loans ("Participations") and assignments of all or a
portion of Loans ("Assignments") from third parties. The Portfolio will have the
right to
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receive payments of principal, interest and any fees to which it is entitled
only from the Lender selling the Participation and only upon receipt by the
Lender of the payments from the borrower. In the event of the insolvency of the
Lender selling a Participation, the Portfolio may be treated as a general
creditor of the Lender and may not benefit from any set-off between the Lender
and the borrower. Certain Participations may be structured in a manner designed
to avoid purchasers of Participations being subject to the credit risk of the
Lender with respect to the Participation. Even under such a structure, in the
event of the Lender's insolvency, the Lender's servicing of the Participation
may be delayed and the assignability of the Participation may be impaired. The
Portfolio will acquire Participations only if the Lender interpositioned between
the Portfolio and the borrower is determined by the Adviser to be creditworthy.
When the Portfolio purchases Assignments from Lenders it will acquire direct
rights against the borrower on the Loan. However, because Assignments are
arranged through private negotiations between potential assignees and potential
assignors, the rights and obligations acquired by the Portfolio as the purchaser
of an Assignment may differ from, and be more limited than, those held by the
assigning Lender. Because there is no liquid market for such securities, the
Portfolio anticipates that such securities could be sold only to a limited
number of institutional investors. The lack of a liquid secondary market may
have an adverse impact on the value of such securities and the Portfolio's
ability to dispose of particular Assignments or Participations when necessary to
meet the Portfolio's liquidity needs or in response to a specific economic event
such as a deterioration in the creditworthiness of the borrower. The lack of a
liquid secondary market for Assignments and Participations also may make it more
difficult for the Portfolio to assign a value to these securities for purposes
of valuing the Portfolio's portfolio and calculating its net asset value.
LOANS OF PORTFOLIO SECURITIES. The Portfolios may lend securities to
brokers, dealers, domestic and foreign banks or other financial institutions for
the purpose of increasing their net investment income. These loans must be
secured continuously by cash or equivalent collateral, or by a letter of credit
at least equal to the market value of the securities loaned plus accrued
interest or income. There may be a risk of delay in recovery of the securities
or even loss of rights in the collateral should the borrower of the securities
fail financially. Each Portfolio will not enter into securities loan
transactions exceeding in the aggregate, 33 1/3% of the market value of its
total assets. For more detailed information about securities lending see
"Investment Objectives and Policies" in the Statement of Additional Information.
MONEY MARKET INSTRUMENTS. Each Portfolio is permitted to invest in money
market instruments, although each Portfolio intends to stay invested in
securities satisfying its primary investment objective to the extent practical.
The Portfolios may make money market investments pending other investment or
settlement for liquidity, or in adverse market conditions. The money market
investments permitted for the Portfolios include: obligations of the United
States government and its agencies and instrumentalities; obligations of foreign
sovereignties; other debt securities; commercial paper including bank
obligations; certificates of deposit (including Eurodollar certificates of
deposit); and repurchase agreements. For more detailed information about these
money market investments, see "Description of Securities and Ratings" in the
Statement of Additional Information.
NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED
SECURITIES. The Portfolios may invest in securities that are neither listed on
a stock exchange nor traded over-the-counter, including privately placed
securities. Investing in such unlisted emerging country equity securities,
including investments in new and early stage companies, may involve a high
degree of business and financial risk that can result in substantial
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losses. As a result of the absence of a public trading market for these
securities, they may be less liquid than publicly traded securities. Although
these securities may be resold in privately negotiated transactions, the prices
realized from these sales could be less than those originally paid by the
Portfolio, or less than what may be considered the fair value of such
securities. Further, companies whose securities are not publicly traded may not
be subject to the disclosure and other investor protection requirements which
might be applicable if their securities were publicly traded. If such securities
are required to be registered under the securities laws of one or more
jurisdictions before being resold, the Portfolio may be required to bear the
expenses of registration.
As a general matter, each Portfolio may not invest more than 15% of its net
assets in illiquid securities, including securities for which there is no
readily available secondary market nor more than 10% of its total assets in
securities that are restricted from sale to the public without registration
("Restricted Securities") under the Securities Act of 1933 (the "1933 Act").
Nevertheless, subject to the foregoing limit on illiquid securities, the
Portfolio may invest up to 25% of its total assets in Restricted Securities that
can be offered and sold to qualified institutional buyers under Rule 144A under
that Act ("144A Securities"). The Board of Directors has adopted guidelines and
delegated to the Adviser, subject to the supervision of the Board of Directors,
the daily function of determining and monitoring the liquidity of 144A
Securities. Rule 144A securities may become illiquid if qualified institutional
buyers are not interested in acquiring the securities.
REPURCHASE AGREEMENTS. Each Portfolio may enter into repurchase agreements
with brokers, dealers or banks that meet the credit guidelines established by
the Fund's Board of Directors. In a repurchase agreement, the Portfolio buys a
security from a seller that has agreed to repurchase it at a mutually agreed
upon date and price, reflecting the interest rate effective for the term of the
agreement. The term of these agreements is usually from overnight to one week,
and never exceeds one year. Repurchase agreements may be viewed as a fully
collateralized loan of money by the Portfolio to the seller. The Portfolio
always receives securities with a market value at least equal to the purchase
price (including accrued interest) as collateral, and this value is maintained
during the term of the agreement. If the seller defaults and the collateral
value declines, the Portfolio might incur a loss. If bankruptcy proceedings are
commenced with respect to the seller, the Portfolio's realization upon the
collateral may be delayed or limited. The aggregate of certain repurchase
agreements and certain other investments is limited as set forth under
"Investment Limitations."
REVERSE REPURCHASE AGREEMENTS. The Emerging Markets Debt Portfolio may
enter into reverse repurchase agreements with brokers, dealers, domestic and
foreign banks or other financial institutions. In a reverse repurchase
agreement, the Portfolio sells a security and agrees to repurchase it at a
mutually agreed upon date and price, reflecting the interest rate effective for
the term of the agreement. It may also be viewed as the borrowing of money by
the Portfolio. The Portfolio's investment of the proceeds of a reverse
repurchase agreement is the speculative factor known as leverage. The Portfolio
may enter into a reverse repurchase agreement only if the interest income from
investment of the proceeds is greater than the interest expense of the
transaction and the proceeds are invested for a period no longer than the term
of the agreement. The Portfolio will maintain with the Custodian a separate
account with a segregated portfolio of cash, U.S. Government securities or other
liquid high grade debt obligations in an amount at least equal to its purchase
obligations under these agreements. If interest rates rise during a reverse
repurchase agreement, it may adversely affect the Portfolio's ability to
maintain a stable net asset value. The aggregate of these agreements is limited
as set forth under "Investment Limitations." Reverse repurchase agreements are
considered to be borrowings and are subject to the percentage limitations on
borrowings set forth in "Investment Limitations."
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RUSSIAN SECURITIES TRANSACTIONS. The Emerging Markets Portfolio may invest
in equity securities of Russian companies. The registration, clearing and
settlement of securities transactions in Russia are subject to significant risks
not normally associated with securities transactions in the United States and
other more developed markets. Ownership of shares in Russian companies is
evidenced by entries in a company's share register (except where shares are held
through depositories that meet the requirements of the 1940 Act) and the
issuance of extracts from the register or, in certain limited cases, by formal
share certificates. However, Russian share registers are frequently unreliable
and the Portfolio could possibly lose its registration through oversight,
negligence or fraud. Moreover, Russia lacks a centralized registry to record
securities transactions and registrars located throughout Russia or the
companies themselves maintain share registers. Registrars are under no
obligation to provide extracts to potential purchasers in a timely manner or at
all and are not necessarily subject to effective state supervision. In addition,
while registrars are liable under law for losses resulting from their errors, it
may be difficult for the Portfolio to enforce any rights it may have against the
registrar or issuer of the securities in the event of loss of share
registration. Although Russian companies with more than 1,000 shareholders are
required by law to employ an independent company to maintain share registers, in
practice, such companies have not always followed this law. Because of this lack
of independence of registrars, management of a Russian company may be able to
exert considerable influence over who can purchase and sell the company's shares
by illegally instructing the registrar to refuse to record transactions on the
share register. Furthermore, these practices may prevent the Portfolio from
investing in the securities of certain Russian companies deemed suitable by the
Adviser and could cause a delay in the sale of Russian securities by the
Portfolio if the company deems a purchaser unsuitable, which may expose the
Portfolio to potential loss on its investment.
In light of the risks described above, the Board of Directors of the
Portfolio has approved certain procedures concerning the Portfolio's investments
in Russian securities. Among these procedures is a requirement that the
Portfolio will not invest in the securities of a Russian company unless that
issuer's registrar has entered into a contract with the Portfolio's
sub-custodian containing certain protective conditions including, among other
things, the sub-custodian's right to conduct regular share confirmations on
behalf of the Portfolio. This requirement will likely have the effect of
precluding investments in certain Russian companies that the Portfolio would
otherwise make.
SHORT SALES. The Emerging Markets Debt Portfolio may from time to time sell
securities short without limitation. A short sale is a transaction in which the
Investment Fund would sell securities it does not own (but has borrowed) in
anticipation of a decline in the market price of the securities. When the
Portfolio makes a short sale, the proceeds it receives from the sale will be
held on behalf of a broker until the Portfolio replaces the borrowed securities.
To deliver the securities to the buyer, the Portfolio will need to arrange
through a broker to borrow the securities and, in so doing, the Investment Fund
will become obligated to replace the securities borrowed at their market price
at the time of replacement, whatever that price may be. The Portfolio may have
to pay a premium to borrow the securities and must pay any dividends or interest
payable on the securities until they are replaced.
The Portfolio's obligation to replace the securities borrowed in connection
with a short sale will be secured by collateral deposited with the broker that
consists of cash, U.S. government securities or other liquid, high grade debt
obligations. In addition, the Portfolio will place in a segregated account with
its Custodian an amount of cash, U.S. government securities or other liquid high
grade debt obligations equal to the difference, if any, between (1) the market
value of the securities sold at the time they were sold short and (2) any cash,
U.S.
21
<PAGE>
government securities or other liquid high grade debt obligations deposited as
collateral with the broker in connection with the short sale (not including the
proceeds of the short sale). Short sales by the Investment Fund involve certain
risks and special considerations. Possible losses from short sales differ from
losses that could be incurred from a purchase of a security, because losses from
short sales may be unlimited, whereas losses from purchases can equal only the
total amount invested.
STOCK OPTION AND INDEX FUTURES CONTRACTS. Each Portfolio may seek to
increase its return or may hedge all or a portion of its portfolio investments
through stock options and stock index futures contracts with respect to
securities in which the Portfolio may invest. There currently are limited
options and stock index futures markets in emerging countries and the nature of
the strategies adopted by the Adviser and the extent to which those strategies
are used will depend on the development of stock option and stock index futures
contracts by emerging country stock exchanges. Each Portfolio will only engage
in transactions in stock options and stock index futures contracts which are
traded on a recognized securities or futures exchange.
The Emerging Markets Debt Portfolio may write (i.e., sell) covered call
options on securities and loan participations and assignments held in its
portfolio, which options give the purchaser the right to buy the underlying
security, loan participation or assignment covered by the option from the
Portfolio at the stated exercise price. A "covered" call option means that so
long as the Portfolio is obligated as the writer of the option, it will own (i)
the underlying security, loan participation or assignment subject to the option,
or (ii) securities convertible or exchangeable without the payment of any
consideration into the security, loan participation or assignment subject to the
option. As a matter of operating policy, the aggregate value of the underlying
securities, loan participations and assignments on which options will be written
at any one time will not exceed 5% of the total assets of the Portfolio. In
addition, as a matter of operating policy, the Portfolio may purchase put and
call options on securities, loan participations or assignments.
The Portfolio will receive a premium from writing call options, which
increases the Portfolio's return on the underlying security, loan participation
or assignment in the event the option expires unexercised or is closed out at a
profit. By writing a call, the Portfolio will limit its opportunity to profit
from an increase in the market value of the underlying security, loan
participation or assignment above the exercise price of the option for as long
as the Portfolio's obligation as writer of the option continues. Thus, in some
periods the Portfolio will receive less total return and in other periods
greater total return from writing covered call options than it would have
received from its underlying securities, loan participations and assignments had
it not written call options. The Portfolio pays a premium to purchase an option
and the risk assumed by the Portfolio when it purchases an option is the loss of
this premium. Because the price of an option tends to move with that of its
underlying security, if the Portfolio is to make a profit, the price of the
underlying security, loan participation or assignment must change and the change
must be sufficient to cover the premiums and commissions paid. A price change in
the security, loan participation or assignment underlying the option does not
assure a profit because prices in the options markets may not always reflect
such change.
The Emerging Markets Debt Portfolio may purchase and sell indexed financial
futures contracts. An indexed futures contract is an agreement to take or make
delivery of an amount of cash equal to the difference between the value of the
index at the beginning and at the end of the contract period. Successful use of
indexed futures will be subject to the Adviser's ability to predict correctly
movements in the direction of the relevant debt market. No assurance can be
given that the Adviser's judgment in this respect will be correct.
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<PAGE>
The Portfolio may sell indexed financial futures contracts in anticipation
of or during a market decline to attempt to offset the decrease in market value
of securities in its portfolio that might otherwise result. When the Portfolio
is not fully invested in emerging country debt securities and anticipates a
significant market advance, it may purchase indexed futures in order to gain
rapid market exposure that may in part or entirely offset increases in the cost
of securities that it intends to purchase. In a substantial majority of these
transactions, the Portfolio will purchase such securities upon termination of
the futures position but, under unusual market conditions, a futures position
may be terminated without the corresponding purchase of debt securities.
STRUCTURED SECURITIES. The Emerging Markets Debt Portfolio may invest a
portion of its assets in entities organized and operated solely for the purpose
of restructuring the investment characteristics of sovereign debt obligations.
This type of restructuring involves the deposit with, or purchase by, an entity,
such as a corporation or trust, of specified instruments (such as commercial
bank loans or Brady Bonds) and the issuance by that entity of one or more
classes of securities ("Structured Securities") backed by, or representing
interests in, the underlying instruments. The cash flow on the underlying
instruments may be apportioned among the newly issued Structured Securities to
create securities with different investment characteristics, such as varying
maturities, payment priorities and interest rate provisions, and the extent of
the payments made with respect to Structured Securities is dependent on the
extent of the cash flow on the underlying instruments. Because Structured
Securities of the type in which the Portfolio anticipates it will invest
typically involve no credit enhancement, their credit risk generally will be
equivalent to that of the underlying instruments. The Portfolio is permitted to
invest in a class of Structured Securities that is either subordinated or
unsubordinated to the right of payment of another class. Subordinated Structured
Securities typically have higher yields and present greater risks than
unsubordinated Structured Securities. Structured Securities are typically sold
in private placement transactions, and there currently is no active trading
market for Structured Securities.
TEMPORARY INVESTMENTS. During periods in which the Adviser believes changes
in economic, financial or political conditions make it advisable, the Emerging
Markets Portfolio may reduce its holdings in equity and other securities, and
the Emerging Markets Debt Portfolio may reduce its holdings in emerging country
debt securities, for temporary defensive purposes, and the Portfolios may invest
in certain short-term (less than twelve months to maturity) and medium-term (not
greater than five years to maturity) debt securities or may hold cash. The
short-term and medium-term debt securities in which the Portfolio may invest
consist of (a) obligations of the U.S. or emerging country governments, their
respective agencies or instrumentalities; (b) bank deposits and bank obligations
(including certificates of deposit, time deposits and bankers' acceptances) of
U.S. or emerging country banks denominated in any currency; (c) floating rate
securities and other instruments denominated in any currency issued by
international development agencies; (d) finance company and corporate commercial
paper and other short-term corporate debt obligations of United States and
emerging country corporations meeting the Portfolio's credit quality standards;
and (e) repurchase agreements with banks and broker-dealers with respect to such
securities. For temporary defensive purposes, the Portfolios intend to invest
only in short-term and medium-term debt securities that the Adviser believes to
be of high quality, i.e., subject to relatively low risk of loss of interest or
principal (there is currently no rating system for debt securities in most
emerging countries).
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each Portfolio may purchase
securities on a when-issued or delayed delivery basis. In such transactions,
instruments are bought with payment and delivery taking place in the future in
order to secure what is considered to be an advantageous yield or price at the
time of the
23
<PAGE>
transaction. Each Portfolio will maintain with the Custodian a separate account
with a segregated portfolio of high grade debt securities or equity securities
or cash in an amount at least equal to these commitments. The payment obligation
and the interest rates that will be received are each fixed at the time the
Portfolio enters into the commitment and no interest accrues to the Portfolio
until settlement. Thus, it is possible that the market value at the time of
settlement could be higher or lower than the purchase price if, among other
factors, the general level of interest rates has changed. It is a current policy
of each Portfolio not to enter into when-issued commitments or delayed delivery
securities exceeding, in the aggregate, 15% of the market value of the
Portfolio's total assets less liabilities, other than the obligations created by
these commitments.
INVESTMENT LIMITATIONS
Each Portfolio is a non-diversified portfolio under the 1940 Act, which
means that the Portfolio is not limited by the 1940 Act in the proportion of its
assets that may be invested in the obligations of a single issuer. Thus, each
Portfolio may invest a greater proportion of its assets in the securities of a
smaller number of issuers and, as a result, will be subject to greater risk with
respect to its portfolio securities. However, each Portfolio intends to comply
with the diversification requirements imposed by the Internal Revenue Code of
1986, as amended, for qualification as a regulated investment company. See
"Taxes" below and "Investment Limitations" in the Statement of Additional
Information.
Each Portfolio operates under certain investment restrictions that are
deemed fundamental limitations and may be changed only with the approval of the
holders of a majority of the Portfolio's outstanding shares. See "Investment
Limitations" in the Statement of Additional Information. In addition, each
Portfolio operates under certain non-fundamental investment limitations as
described below and in the Statement of Additional Information. Each Portfolio
may not (i) enter into repurchase agreements with more than seven days to
maturity if, as a result, more than 15% of the market value of the Portfolio's
net assets would be invested in such repurchase agreements and other investments
for which market quotations are not readily available or which are otherwise
illiquid; (ii) borrow money, except from banks for extraordinary or emergency
purposes, and then only in amounts up to 10% of the value of the Portfolio's
total assets taken at cost at the time of borrowing; or purchase securities
while borrowings exceed 5% of its total assets, except the Emerging Markets Debt
Portfolio is not subject to such limits on borrowing and may borrow from banks
and other entities in amounts not in excess of 33 1/3% of its total assets
(including the amount borrowed) less liabilities; (iii) mortgage, pledge or
hypothecate any assets except in connection with any such borrowing in amounts
up to 10% of the value of the Portfolio's net assets at the time of borrowing;
(iv) invest in fixed time deposits with a duration of over seven calendar days;
or (v) invest in fixed time deposits with a duration of from two business days
to seven calendar days if more than 10% of the Portfolio's total assets would be
invested in these deposits.
LOCAL ADMINISTRATOR FOR THE EMERGING MARKETS PORTFOLIO
The Emerging Markets Portfolio is required under Brazilian law to have a
local administrator in Brazil. Unibanco-Uniao (the "Brazilian Administrator"), a
Brazilian corporation, acts as the Portfolio's Brazilian administrator pursuant
to an agreement with the Portfolio (the "Brazilian Administration Agreement).
Under the Brazilian Administration Agreement, the Brazilian Administrator
performs various services for the Portfolio, including effecting the
registration of the Portfolio's foreign capital with the Central Bank of Brazil
effecting all foreign exchange transactions related to the Portfolio's
investments in Brazil and obtaining all approvals required for the Portfolio to
make remittances of income and capital gains and for the repatriation of the
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<PAGE>
Portfolio's investments pursuant to Brazilian law. For its services, the
Brazilian Administrator is paid an annual fee equal to 0.125% of the Portfolio's
average weekly net assets invested in Brazil, paid monthly. The principal office
of the Brazilian Administrator is located at Avenida Eusebio Matoso, 891, Sao
Paulo, S.P, Brazil. The Brazilian Administration Agreement is terminable upon
six months' notice by either party. The Brazilian Administrator may be replaced
only by an entity authorized to act as a joint manager of a managed portfolio of
bonds and securities under Brazilian law.
The Emerging Markets Portfolio is required under Colombian law to have a
local administrator in Colombia. CitiTrust S.A. (the "Colombian Administrator"),
a Colombian Trust Company, acts as the Portfolio's Colombian administrator
pursuant to an agreement with the Portfolio (the "Colombian Agreement"). Under
the Colombian Agreement, the Colombian Administrator performs various services
for the Portfolio, including effecting the registration of the Portfolio's
foreign capital with the Central Bank of Colombia, effecting all foreign
exchange transactions related to the Portfolio's investments in Colombia and
obtaining all approvals required for the Portfolio to make remittances of income
and capital gains and for the repatriation of the Portfolio's investments
pursuant to Colombian law. For its services, the Colombian Administrator is paid
an annual fee of $1000 plus .20% per transaction. The principal office of the
Colombian Administrator is located at Sociedad Fiduciaria International S.A.,
8-89, Piso 2, Santa Fe de Bogota, Colombia. The Colombian Agreement is
terminable upon 30 days' notice by either party. The Colombian Administrator may
be replaced only by an entity authorized to act as a joint manager of a managed
portfolio of bonds and securities under Colombian law.
MANAGEMENT OF THE FUND
INVESTMENT ADVISER. Morgan Stanley Asset Management Inc. is the Investment
Adviser and Administrator of the Fund and each of the Portfolios. The Adviser
provides investment advice and portfolio management services, pursuant to an
Investment Advisory Agreement and, subject to the supervision of the Fund's
Board of Directors, makes each of the Portfolio's day-to-day investment
decisions, arranges for the execution of portfolio transactions and generally
manages each of the Portfolio's investments. The Adviser is entitled to receive
from each Portfolio an annual management fee, payable quarterly, equal to the
percentage of average daily net assets set forth in the table below. However,
the Adviser has agreed to a reduction in the fees payable to it and to reimburse
the Portfolio, if necessary, if such fees would cause the total annual operating
expenses of either Portfolio to exceed the respective percentages of average
daily net assets set forth in the table below.
<TABLE>
<CAPTION>
MAXIMUM TOTAL ANNUAL
OPERATING
EXPENSES AFTER FEE
WAIVERS
MANAGEMENT -------------------------
PORTFOLIO FEE CLASS A CLASS B
- ------------------------------ ----------- --------- ---------
<S> <C> <C> <C>
Emerging Markets Portfolio 1.25% 1.75% 2.00%
Emerging Markets Debt
Portfolio 1.00% 1.75% 2.00%
</TABLE>
The Adviser, with principal offices at 1221 Avenue of the Americas, New
York, New York 10020, conducts a worldwide portfolio management business,
providing a broad range of portfolio management services to customers in the
United States and abroad. At December 31, 1995, the Adviser, together with its
affiliated asset management companies, managed investments totaling
approximately $57.4 billion, including approximately $41.9 billion under active
management and $15.5 billion as Named Fiduciary or Fiduciary Adviser. See
"Management of the Fund" in the Statement of Additional Information.
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<PAGE>
PORTFOLIO MANAGERS. The following individuals have primary responsibility
for the Portfolio indicated below.
EMERGING MARKETS PORTFOLIO -- MADHAV DHAR. Madhav Dhar is a Managing
Director of Morgan Stanley. He joined the Adviser in 1984 to focus on global
asset allocation and investment strategy and now heads the Adviser's emerging
markets group and serves as the group's principal Portfolio Manager. Mr. Dhar
also coordinates the Adviser's developing country funds effort and has been
involved in the launching of the Adviser's country funds. He is a Director of
the Morgan Stanley Emerging Markets Fund, Inc. (a closed-end investment
company). He holds a B.S. (honors) from St. Stephens College, Delhi University
(India), and an M.B.A. from Carnegie-Mellon University. Mr. Dhar has had primary
responsibility for managing the Portfolio's assets since inception.
EMERGING MARKETS DEBT PORTFOLIO -- PAUL GHAFFARI. Paul Ghaffari is a
Principal of Morgan Stanley. He joined the Adviser in June 1993 as a Vice
President and Portfolio Manager for the Morgan Stanley Emerging Markets Debt
Fund (a closed-end investment company). Prior to joining the Adviser, Mr.
Ghaffari was a Vice President in the Fixed Income Division of the Emerging
Markets Sales and Trading Department at Morgan Stanley. From 1983 to 1992, he
worked in LDC Sales and Trading Department and the Mortgage-Backed Securities
Department at J.P. Morgan & Co. Inc. and worked in the Treasury Department at
the Morgan Guaranty Trust Co. He holds a B.A. in International Relations from
Pamona College and an M.S. in Foreign Service from Georgetown University. Mr.
Ghaffari has had primary responsibility for managing the Portfolio's assets
since inception.
ADMINISTRATOR. The Adviser also provides the Fund with administrative
services pursuant to an Administration Agreement. The services provided under
the Administration Agreement are subject to the supervision of the Officers and
the Board of Directors of the Fund and include day-to-day administration of
matters related to the corporate existence of the Fund, maintenance of its
records, preparation of reports, supervision of the Fund's arrangements with its
custodian, and assistance in the preparation of the Fund's registration
statements under federal and state laws. The Administration Agreement also
provides that the Administrator, through its agents, will provide the Fund
dividend disbursing and transfer agent services. For its services under the
Administration Agreement, the Fund pays the Adviser a monthly fee which on an
annual basis equals 0.15% of the average daily net assets of each Portfolio.
Under an agreement between the Adviser and The Chase Manhattan Bank, N.A.
("Chase"), Chase provides certain administrative services to the Fund. In a
merger completed on September 1, 1995, Chase succeeded to all of the rights and
obligations under the U.S. Trust Administration Agreement between the Adviser
and United States Trust Company of New York ("U.S. Trust"), pursuant to which
U.S. Trust had agreed to provide certain administrative services to the Fund.
Pursuant to a delegation clause in the U.S. Trust Administration Agreement, U.S.
Trust delegated its administration responsibilities to Chase Global Funds
Services Company ("CGFSC"), formerly known as Mutual Funds Service Company,
which after the merger with Chase is a subsidiary of Chase and will continue to
provide certain administrative services to the Fund. The Adviser supervises and
monitors administrative services provided by CGFSC. The services provided under
the Administration Agreement and the U.S. Trust Administration Agreement are
also subject to the supervision of the Board of Directors of the Fund. The Board
of Directors of the Fund has approved the provision of services described above
pursuant to the Administration Agreement and the U.S. Trust Administration
Agreement as being in the best interest of the
26
<PAGE>
Fund. CGFSC's business address is 73 Tremont Street, Boston, Massachusetts
02108-3913. For additional information regarding the Administration Agreement or
the U.S. Trust Administration Agreement, see "Management of the Fund" in the
Statement of Additional Information.
DIRECTORS AND OFFICERS. Pursuant to the Fund's Articles of Incorporation,
the Board of Directors decides upon matters of general policy and reviews the
actions of the Fund's Adviser, Administrator and Distributor. The Officers of
the Fund conduct and supervise its daily business operations.
DISTRIBUTOR. Morgan Stanley serves as the exclusive Distributor of the
shares of the Fund. Under its Distribution Agreement with the Fund, Morgan
Stanley sells shares of each Portfolio upon the terms and at the current
offering price described in this Prospectus. Morgan Stanley is not obligated to
sell any certain number of shares of any Portfolio.
The Portfolios currently offer only the classes of shares offered by this
Prospectus. The Portfolio may in the future offer one or more classes of shares
with features, distribution expenses or other expenses that are different from
those of the classes currently offered.
The Fund has adopted a Plan of Distribution with respect to the Class B
shares for each Portfolio pursuant to Rule 12b-1 under the 1940 Act (each a
"Plan"). Under each Plan, the Distributor is entitled to receive from the
Portfolios a distribution fee, which is accrued daily and paid quarterly, of
0.25% of the Class B shares' average daily net assets on an annualized basis.
The Distributor expects to reallocate most of its fee to its investment
representatives. The Distributor may, in its discretion, voluntarily waive from
time to time all or any portion of its distribution fee and each of the
Distributor and the Adviser is free to make additional payments out of its own
assets to promote the sale of Fund shares, including payments that compensate
financial institutions for distribution services or shareholder services.
Each Plan is designed to compensate the Distributor for its services, not to
reimburse the Distributor for its expenses, and the Distributor may retain any
portion of the fee that it does not expend in fulfillment of its obligations to
the Fund.
PAYMENTS TO FINANCIAL INSTITUTIONS. The Adviser or its affiliates may
compensate certain financial institutions for the continued investment of their
customers' assets in the Emerging Markets Portfolio pursuant to the advice of
such financial institutions. These payments will be made directly by the Adviser
or its affiliates from their assets, and will not be made from the assets of the
Fund or by the assessment of a sales charge on shares. Such financial
institutions may also perform certain shareholder or recordkeeping services that
would otherwise be performed by CGFSC. The Adviser may elect to enter into a
contract to pay the financial institutions for such services.
EXPENSES. Each Portfolio is responsible for payment of certain other fees
and expenses (including organizational costs, legal fees, accountant's fees,
custodial fees, and printing and mailing costs) specified in the Administration
and Distribution Agreements.
PURCHASE OF SHARES
Class A and Class B shares of each Portfolio may be purchased, without sales
commission, at the net asset value per share next determined after receipt of
the purchase order by the Portfolio. See "Valuation of Shares."
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<PAGE>
MINIMUM INVESTMENT AND ACCOUNT SIZES; CONVERSION FROM CLASS A TO CLASS B SHARES
For an account for either Portfolio opened on or after January 2, 1996 (a
"New Account"), the minimum initial investment and minimum account size are
$500,000 for Class A shares and $100,000 for Class B shares. Managed Accounts
may purchase Class A shares without being subject to any minimum initial
investment or minimum account size requirements for a Portfolio account.
Officers of the Adviser and its affiliates are subject to the minimums for a
Portfolio account, except they may purchase Class B shares subject to a minimum
initial investment and minimum account size of $5,000 for a Portfolio account.
If the value of a New Account containing Class A shares falls below $500,000
(but remains at or above $100,000) because of shareholder redemption(s), the
Fund will notify the shareholder, and if the account value remains below
$500,000 (but remains at or above $100,000) for a continuous 60-day period, the
Class A shares in such account will convert to Class B shares and will be
subject to the distribution fee and other features applicable to the Class B
shares. The Fund, however, will not convert Class A shares to Class B shares
based solely upon changes in the market that reduce the net asset value of
shares. Under current tax law, conversions between share classes are not a
taxable event to the shareholder.
Shares in a Portfolio account opened prior to January 2, 1996 (a "Pre-1996
Account") were designated Class A shares on January 2, 1996. Shares in a
Pre-1996 Account with a value of $100,000 or more on March 1, 1996 (a
"Grandfathered Class A Account") remained Class A shares regardless of account
size thereafter. Except for shares in a Managed Account, shares in a Pre-1996
Account with a value of less than $100,000 on March 1, 1996 (a "Grandfathered
Class B Account") converted to Class B shares on March 1, 1996. Grandfathered
Class A Accounts and Managed Accounts are not subject to conversion from Class A
shares to Class B shares.
Investors may also invest in the Fund by purchasing shares through a trust
department, broker, dealer, agent, financial planner, financial services firm or
investment adviser. An investor may be charged an additional service or
transaction fee by that institution. The minimum investment levels may be waived
at the discretion of the Adviser for (i) certain employees and customers of
Morgan Stanley or its affiliates and certain trust departments, brokers,
dealers, agents, financial planers, financial services firms or investment
advisers that have entered into an agreement with Morgan Stanley or its
affiliates; and (ii) retirement and deferred compensation plans and trusts, used
to fund such plans, including, but not limited to, those defined in Section
401(a), 403(b) or 457 of the Internal Revenue Code of 1986, as amended, and
"rabbi trusts". The Fund reserves the right to modify or terminate the
conversion features of the shares as stated above at any time upon 60-days'
notice to shareholders.
MINIMUM ACCOUNT SIZES AND INVOLUNTARY REDEMPTION OF SHARES
If the value of a New Account falls below $100,000 because of shareholder
redemption(s), the Fund will notify the shareholder, and if the account value
remains below $100,000 for a continuous 60-day period, the shares in such
account are subject to redemption by the Fund and, if redeemed, the net asset
value of such shares will be promptly paid to the shareholder. The Fund,
however, will not redeem shares based solely upon changes in the market that
reduce the net asset value of shares.
For purposes of redemptions by the Fund, the foregoing minimum account size
requirements do not apply to New Accounts containing Class B shares held by
officers of the Adviser or its affiliates. However, if the value of such account
held by an officer of the Adviser or its affiliates falls below $5,000 because
of shareholder
28
<PAGE>
redemptions(s), the Fund will notify the shareholder, and if the account value
remains $5,000 for a continuous 60-day period, the shares in such account are
subject to redemption by the Fund and, if redeemed, the net asset value of such
shares will be promptly paid to the shareholder.
Grandfathered Class A Accounts, Grandfathered Class B Accounts and Managed
Accounts are not subject to involuntary redemption.
The Fund reserves the right to modify or terminate the involuntary
redemption features of the shares as stated above at any time upon 60-days'
notice to shareholders.
CONVERSION FROM CLASS B TO CLASS A SHARES
If the value of Class B shares in a Portfolio account increases, whether due
to shareholder share purchases or market activity, to $500,000 or more, the
Class B shares will convert to Class A shares. Under current tax law, such
conversion is not a taxable event to the shareholder. Class A shares converted
from Class B shares are subject to the same minimum account size requirements
that are applicable to New Accounts containing Class A shares, as stated above.
The Fund reserves the right to modify or terminate this conversion feature at
any time upon 60-days' notice to shareholders.
INITIAL PURCHASES DIRECTLY FROM THE FUND
The Fund's determination of an investor's eligibility to purchase shares of
a given class will take precedence over the investor's selection of a class.
Assuming the investor is eligible for the class, the Fund will select the most
favorable class for the investor, if the investor has not done so.
1) BY CHECK. An account may be opened by completing and signing an Account
Registration Form, and mailing it, together with a check ($500,000 minimum
for Class A shares of each Portfolio and $100,000 for Class B shares of each
Portfolio, with certain exceptions for Morgan Stanley employees and select
customers) payable to "Morgan Stanley Institutional Fund, Inc. -- [portfolio
name]", to:
Morgan Stanley Institutional Fund, Inc.
P.O. Box 2798
Boston, Massachusetts 02208-2798
Payment will be accepted only in U.S. dollars, unless prior approval for
payment by other currencies is given by the Fund. The Portfolio(s) to be
purchased should be designated on the Account Registration Form. For purchases
by check, the Fund is ordinarily credited with Federal Funds within one
business day. Thus your purchase of shares by check is ordinarily credited to
your account at the net asset value per share of each of the Portfolios
determined on the next business day after receipt.
2) BY FEDERAL FUNDS WIRE. Purchases may be made by having your bank wire
Federal Funds to the Fund's bank account. In order to ensure prompt receipt
of your Federal Funds Wire, it is important that you follow these steps:
A. Telephone the Fund (toll free: 1-800-548-7786) and provide us with your
name, address, telephone number, Social Security or Tax Identification
Number, the portfolio(s) selected, the class selected, the amount being
wired, and by which bank. We will then provide you with a Fund account
number. (Investors with existing accounts should also notify the Fund prior
to wiring funds.)
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<PAGE>
B. Instruct your bank to wire the specified amount to the Fund's Wire
Concentration Bank Account (be sure to have your bank include the name of
the portfolio(s) selected, the class selected and the account number
assigned to you) as follows:
Chase Manhattan Bank, N.A.
One Manhattan Plaza
New York, NY 10081-1000
ABA#021000021
DDA# 910-2-733293
Attn: Morgan Stanley Institutional Fund, Inc.
Ref: (Portfolio name, your account number, your account name)
Please call the Fund at 1-800-548-7786 prior to wiring funds.
C. Complete and sign the Account Registration Form and mail it to the address
shown thereon.
Purchase orders for shares of each Portfolio which are received prior to the
regular close of the NYSE (currently 4:00 p.m. Eastern Time) will be executed
at the price computed on the date of receipt as long as the Transfer Agent
receives payment by check or in Federal Funds prior to the regular close of
the NYSE on such day.
Federal Funds purchase orders will be accepted only on a day on which the Fund
and Chase (the "Custodian Bank") are open for business. Your bank may charge a
service fee for wiring Federal funds.
3) BY BANK WIRE. The same procedure outlined under "By Federal Funds Wire"
above must be followed in purchasing shares by bank wire. However, money
transferred by bank wire may or may not be converted into Federal Funds the
same day, depending on the time the money is received and the bank handling
the wire. Prior to such conversion, an investor's money will not be invested.
Your bank may charge a service fee for wiring funds.
ADDITIONAL INVESTMENTS
You may add to your account at any time (minimum additional investment
$1,000, except for automatic reinvestment of dividends and capital gains
distributions for which there are no minimums) by purchasing shares at net asset
value by mailing a check to the Fund (payable to "Morgan Stanley Institutional
Fund Inc. -- [portfolio name]") at the above address or by wiring monies to the
Custodian Bank as outlined above. It is very important that your account name
and portfolio be specified in the letter or wire to ensure proper crediting to
your account. In order to ensure that your wire orders are invested promptly,
you are requested to notify one of the Fund's representatives (toll free:
1-800-548-7786) prior to the wire date. Additional investments will be applied
to purchase additional shares in the same class held by a shareholder in a
Portfolio account.
OTHER PURCHASE INFORMATION
The purchase price of the Class A and Class B shares of the Portfolios is
the net asset value next determined after the order is received. See "Valuation
of Shares." An order received prior to the regular close of the New York Stock
Exchange ("NYSE"), which is currently 4:00 p.m. Eastern Time, will be executed
at the price
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computed on the date of receipt; an order received after the regular close of
the NYSE will be executed at the price computed on the next day the NYSE is open
as long as the Transfer Agent receives payment by check or in Federal Funds
prior to the regular close of the NYSE on such day.
Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends. The net asset value of Class B shares will generally be
lower than the net asset value of Class A shares as a result of the distribution
expense charged to Class B shares. It is expected, however, that the net asset
value per share of the two classes will tend to converge immediately after the
recording of dividends which will differ by approximately the amount of the
distribution expense accrual differential between the classes.
In the interest of economy and convenience, and because of the operating
procedures of the Fund, certificates representing shares of the Portfolios will
not be issued. All shares purchased are confirmed to you and credited to your
account on the Fund's books maintained by the Adviser or its agents. You will
have the same rights and ownership with respect to such shares as if
certificates had been issued.
To ensure that checks are collected by the Fund, withdrawals of investments
made by check are not presently permitted until payment for the purchase has
been received, which may take up to eight business days after the date of
purchase. As a condition of this offering, if a purchase is canceled due to
nonpayment or because your check does not clear, you will be responsible for any
loss the Fund or its agents incur. If you are already a shareholder, the Fund
may redeem shares from your account(s) to reimburse the Fund or its agents for
any loss. In addition, you may be prohibited or restricted from making future
purchases in the Fund.
Investors may also invest in the Fund by purchasing shares through the
Distributor.
EXCESSIVE TRADING
Frequent trades involving either substantial portfolio assets or a
substantial portion of your account or accounts controlled by you can disrupt
management of a portfolio and raise its expenses. Consequently, in the interest
of all the stockholders of each Portfolio and the Portfolio's performance, the
Fund may in its discretion bar a stockholder that engages in excessive trading
of shares of any class of a portfolio from further purchases of shares of the
Fund for an indefinite period. The Fund considers excessive trading to be more
than one purchase and sale involving shares of the same class of a portfolio of
the Fund within any 120-day period. As an example, exchanging shares of
portfolios of the Fund as follows amounts to excessive trading: exchanging Class
A shares of Portfolio A for Class A shares of Portfolio B, then exchanging Class
A shares of Portfolio B for Class A shares of Portfolio C and again exchanging
Class A shares of Portfolio C for Class A shares of Portfolio B within a 120-day
period. Two types of transactions are exempt from these excessive trading
restrictions: (1) trades exclusively between money market portfolios; and (2)
trades done in connection with an asset allocation service, such as TFM
Accounts, managed or advised by MSAM and/or any of its affiliates.
REDEMPTION OF SHARES
You may withdraw all or any portion of the amount in your account by
redeeming shares at any time. Please note that purchases made by check are not
permitted to be redeemed until payment of the purchase has been collected, which
may take up to eight business days after purchase. The Fund will redeem Class A
shares or Class B shares of each Portfolio at the next determined net asset
value of shares of the applicable class. On days
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that both the NYSE and the Custodian Bank are open for business, the net asset
value per share of each of the Portfolios is determined at the regular close of
trading of the NYSE (currently 4:00 p.m. Eastern Time). Shares of the Portfolios
may be redeemed by mail or telephone. No charge is made for redemption. Any
redemption proceeds may be more or less than the purchase price of your shares
depending on, among other factors, the market value of the investment securities
held by the Portfolio.
BY MAIL
Each Portfolio will redeem its Class A or Class B shares at the net asset
value determined on the date the request is received, if the request is received
in "good order" before the regular close of the NYSE. Your request should be
addressed to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798, Boston,
Massachusetts 02208-2798, except that deliveries by overnight courier should be
addressed to Morgan Stanley Institutional Fund, Inc., c/o Chase Global Funds
Services Company, 73 Tremont Street, Boston, Massachusetts 02108-3913.
"Good order" means that the request to redeem shares must include the
following documentation:
(a) A letter of instruction or a stock assignment specifying the class
and number of shares or dollar amount to be redeemed, signed by all
registered owners of the shares in the exact names in which they are
registered;
(b) Any required signature guarantees (see "Further Redemption
Information" below); and
(c) Other supporting legal documents, if required, in the case of
estates, trusts, guardianships, custodianships, corporations, pension and
profit sharing plans and other organizations.
Shareholders who are uncertain of requirements for redemption should consult
with a Morgan Stanley Institutional Fund representative.
BY TELEPHONE
Provided you have previously elected the Telephone Redemption Option on the
Account Registration Form, you can request a redemption of your shares by
calling the Fund and requesting the redemption proceeds be mailed to you or
wired to your bank. Please contact one of Morgan Stanley Institutional Fund's
representatives for further details. In times of drastic market conditions, the
telephone redemption option may be difficult to implement. If you experience
difficulty in making a telephone redemption, your request may be made by mail or
overnight courier and will be implemented at the net asset value next determined
after it is received. Redemption requests sent to the Fund through express mail
must be sent to Morgan Stanley Institutional Fund, Inc., c/o Chase Global Funds
Services Company, 73 Tremont Street, Boston, Massachusetts 02108. The Fund and
the Fund's transfer agent (the "Transfer Agent") will employ reasonable
procedures to confirm that the instructions communicated by telephone are
genuine. These procedures include requiring the investor to provide certain
personal identification information at the time an account is opened and prior
to effecting each transaction requested by telephone. In addition, all telephone
transaction requests will be recorded and investors may be required to provide
additional telecopied written instructions regarding transaction requests.
Neither the Fund nor the Transfer Agent will be responsible for any loss,
liability, cost or expense for following instructions received by telephone that
either of them reasonably believes to be genuine.
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To change the commercial bank or account designated to receive redemption
proceeds, a written request must be sent to the Fund at the address above.
Requests to change the bank or account must be signed by each shareholder and
each signature must be guaranteed.
FURTHER REDEMPTION INFORMATION
Normally the Fund will make payment for all shares redeemed within one
business day of receipt of the request, but in no event will payment be made
more than seven days after receipt of a redemption request in good order.
However, payments to investors redeeming shares which were purchased by check
will not be made until payment for the purchase has been collected, which may
take up to eight days after the date of purchase. The Fund may suspend the right
of redemption or postpone the date upon which redemptions are effected at times
when the NYSE is closed, or under any emergency circumstances as determined by
the Securities and Exchange Commission (the "Commission").
If the Board of Directors determines that it would be detrimental to the
best interests of the remaining shareholders of a Portfolio to make payment
wholly or partly in cash, the Fund may pay the redemption proceeds in whole or
in part by a distribution in-kind of securities held by the Portfolio in lieu of
cash in conformity with applicable rules of the Commission.
Distributions-in-kind will be made in readily marketable securities. Investors
may incur brokerage charges on the sale of portfolio securities so received in
payment of redemptions.
To protect your account, the Fund and its agents from fraud, signature
guarantees are required for certain redemptions to verify the identity of the
person who has authorized a redemption from your account. Please contact the
Fund for further information. See "Redemption of Shares" in the Statement of
Additional Information.
SHAREHOLDER SERVICES
EXCHANGE FEATURES
You may exchange shares that you own in either Portfolio for shares of any
other available portfolio of the Fund (other than the International Equity
Portfolio, which is closed to new investors). In exchanging for shares of a
portfolio with more than one class, the class of shares you receive in the
exchange will be determined in the same manner as any other purchase of shares
and will not be based on the class of shares surrendered for the exchange.
Consequently, the same minimum initial investment and minimum account size for
determining the class of shares received in the exchange will apply. See
"Purchase of Shares." Shares of the portfolios may be exchanged by mail or
telephone. The privilege to exchange shares by telephone is automatic and made
available without shareholder election. Before you make an exchange, you should
read the prospectus of the portfolio(s) in which you seek to invest. Because an
exchange transaction is treated as a redemption followed by a purchase, an
exchange would be considered a taxable event for shareholders subject to tax.
The exchange privilege is only available with respect to portfolios that are
registered for sale in a shareholder's state of residence. The exchange
privilege may be modified or terminated by the Fund at any time upon 60-days'
notice to shareholders.
BY MAIL
In order to exchange shares by mail, you should include in the exchange
request the name, class of shares and account number of your current portfolio,
the names of the portfolio(s) and class(es) of shares into which you intend to
exchange shares, and the signatures of all registered account holders. Send the
exchange request to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798,
Boston, Massachusetts 02208-2798.
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BY TELEPHONE
When exchanging shares by telephone, have ready the name, class of shares
and account number of your current portfolio, the name(s) of the portfolio(s)
and class(es) of shares into which you intend to exchange shares, your Social
Security number or Tax I.D. number, and your account address. Requests for
telephone exchanges received prior to 4:00 p.m. (Eastern Time) are processed at
the close of business that same day based on the net asset value of the class of
each of the portfolios involved in the exchange of shares at the close of
business. Requests received after 4:00 p.m. (Eastern Time) are processed the
next business day based on the net asset value determined at the close of
business on such day. For additional information regarding responsibility for
the authenticity of telephoned instructions, see "Redemption of Shares -- By
Telephone" above.
TRANSFER OF REGISTRATION
You may transfer the registration of any of your Fund shares to another
person by writing to Morgan Stanley Institutional Fund Inc., P.O. Box 2798,
Boston, Massachusetts 02208-2798. As in the case of redemptions, the written
request must be received in good order before any transfer can be made.
Transferring the registration of shares may affect the eligibility of your
account for a given class of each Portfolio's shares and may result in
involuntary conversion or redemption of your shares. See "Purchase of Shares"
above.
VALUATION OF SHARES
The net asset value per share of a class of shares of the Portfolios is
determined by dividing the total market value of the Portfolio's investments and
other assets attributable to such class, less any liabilities attributable to
such class, by the total number of outstanding shares of such class of the
Portfolio. Net asset value is calculated separately for each class of the
Portfolio. Net asset value per share is determined as of the regular close of
the NYSE on each day that the NYSE is open for business. Price information on
listed securities is taken from the exchange where the security is primarily
traded. Securities listed on a U.S. securities exchange for which market
quotations are available are valued at the last quoted sale price on the day the
valuation is made. Securities listed on a foreign exchange are valued at their
closing price. Unlisted securities and listed securities not traded on the
valuation date for which market quotations are not readily available are valued
at a price within a range not exceeding the current asked price nor less than
the current bid price. The current bid and asked prices are determined based on
the bid and asked prices quoted on such valuation date by reputable brokers.
Bonds and other fixed income securities are valued according to the broadest
and most representative market, which will ordinarily be the over-the-counter
market. Net asset value includes interest on fixed income securities, which is
accrued daily. In addition, bonds and other fixed income securities may be
valued on the basis of prices provided by a pricing service when such prices are
believed to reflect the fair market value of such securities. The prices
provided by a pricing service are determined without regard to bid or last sale
prices, but take into account institutional size trading in similar groups of
securities and any developments related to the specific securities. Securities
not priced in this manner are valued at the most recently quoted bid price, or
when securities exchange valuations are used, at the latest quoted sale price on
the day of valuation. If there is no such reported sale, the latest quoted bid
price will be used. Securities purchased with remaining maturities of 60 days or
less are valued at amortized cost, if it approximates market value. In the event
that amortized cost does not approximate market value, market prices as
determined above will be used.
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The value of other assets and securities for which no quotations are readily
available (including restricted and unlisted foreign securities) and those
securities for which it is inappropriate to determined prices in accordance with
the above-stated procedures, are determined in good faith at fair value using
methods determined by the Board of Directors. For purposes of calculating net
asset value per share, all assets and liabilities initially expressed in foreign
currencies will be translated into U.S. dollars at the mean of the bid price and
asked price of such currencies against the U.S. dollar last quoted by any major
bank.
Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends for the class. Dividends will differ by approximately the
amount of the distributions expense accrual differential among the classes. The
net asset value of Class B shares will generally be lower than the net asset
value of the Class A shares as a result of the distribution expense charged to
Class B shares.
PERFORMANCE INFORMATION
The Fund may from time to time advertise the total return for each class of
the Portfolios. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT
INTENDED TO INDICATE FUTURE PERFORMANCE. The "total return" shows what an
investment in a class of the Portfolio would have earned over a specified period
of time (such as one, five or ten years), assuming that all distributions and
dividends by the Portfolio were reinvested in the same class on the reinvestment
dates during the period. Total return does not take into account any federal or
state income taxes that may be payable on dividends and distributions or upon
redemption. The Fund may also include comparative performance information in
advertising or marketing the Portfolio's shares, including data from Lipper
Analytical Services, Inc., other industry publications, business periodicals,
rating services and market indices.
The performance figures for Class B shares will generally be lower than
those for Class A shares because of the distribution fee charged to Class B
shares.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All income dividends and capital gains distributions for a class of shares
will automatically be reinvested in additional shares of such class at net asset
value, except that, upon written notice to the Fund or by checking off the
appropriate box in the Distribution Option Section on the Account Registration
Form, a shareholder may elect to receive income dividends and capital gains
distributions in cash.
Each Portfolio expects to distribute substantially all of its net investment
income in the form of annual dividends. Net realized gains of each Portfolio, if
any, after reduction for any tax loss carryforwards will also be distributed
annually. Confirmations of the purchase of shares of each Portfolio through the
automatic reinvestment of income dividends and capital gains distributions will
be provided, pursuant to Rule 10b-10(b) under The Securities Exchange Act of
1934, as amended, on the next monthly client statement following such purchase
of shares. Consequently, confirmations of such purchases will not be provided at
the time of completion of such purchases as might otherwise be required by Rule
10b-10.
Undistributed net investment income is included in each Portfolio's net
assets for the purpose of calculating net asset value per share. Therefore, on
the "ex-dividend" date, the net asset value per share excludes the dividend
(I.E., is reduced by the per share amount of the dividend). Dividends paid
shortly after the purchase of shares by an investor, although in effect a return
of capital, are taxable to shareholders subject to income tax.
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Because of the distribution fee and any other expenses that may be
attributable to the Class B shares, the net income attributable to and the
dividends payable on Class B shares will be lower than the net income
attributable to and the dividends payable on Class A shares. As a result, the
net asset value per share of the classes of each Portfolio will differ at times.
Expenses of each Portfolio allocated to a particular class of shares thereof
will be borne on a pro rata basis by each outstanding share of that class.
TAXES
The following summary of certain federal income tax consequences is based on
current tax laws and regulations, which may be changed by legislative, judicial,
or administrative action.
No attempt has been made to present a detailed explanation of the federal,
state, or local income tax treatment of a Portfolio or its shareholders.
Accordingly, shareholders are urged to consult their tax advisors regarding
specific questions as to federal, state and local income taxes.
Each Portfolio is treated as a separate entity for federal income tax
purposes and is not combined with the Fund's other portfolios. Each Portfolio
intends to qualify for the special tax treatment afforded regulated investment
companies under Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"), so that the Portfolio will be relieved of federal income tax on
that part of its net investment income and net capital gain that is distributed
to shareholders.
Each Portfolio distributes substantially all of its net investment income
(including, for this purpose, net short-term capital gain) to shareholders.
Dividends from a Portfolio's net investment income are taxable to shareholders
as ordinary income, whether received in cash or in additional shares. Such
dividends paid by a Portfolio generally will qualify for the 70%
dividends-received deduction for corporate shareholders. Each Portfolio will
report annually to its shareholders the amount of dividend income qualifying for
such treatment.
Distributions of net capital gain (the excess of net long-term capital gain
over net short-term capital loss) are taxable to shareholders as long-term
capital gain, regardless of how long shareholders have held their shares. Each
Portfolio sends reports annually to shareholders of the federal income tax
status of all distributions made during the preceding year.
Each Portfolio intends to make sufficient distributions or deemed
distributions of its ordinary income and capital gain net income (the excess of
short-term and long-term capital gains over short-term and long-term capital
losses), including any available capital loss carryforwards, prior to the end of
each calendar year to avoid liability for federal excise tax.
Dividends and other distributions declared by a Portfolio in October,
November or December of any year and payable to shareholders of record on a date
in such month will be deemed to have been paid by the Portfolio and received by
the shareholders on December 31 of that year if the distributions are paid by
the Portfolio at any time during the following January.
The sale, exchange or redemption of shares may result in taxable gain or
loss to the selling, exchanging or redeeming shareholder, depending upon whether
the fair market value of the redemption proceeds exceeds or is less than the
Shareholder's adjusted basis in the sold, exchanged or redeemed shares. If
capital gain distributions have been made with respect to shares that are sold
at a loss after being held for six months or less, then the loss is treated as a
long-term capital loss to the extent of the capital gain distributions.
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The conversion of Class A shares to Class B shares should not be a taxable
event to the shareholder.
Shareholders are urged to consult with their tax advisors concerning the
application of state and local income taxes to investments in a Portfolio, which
may differ from the federal income tax consequences described above.
Investment income received by a Portfolio from sources within foreign
countries may be subject to foreign income taxes withheld at the source. To the
extent that a Portfolio is liable for foreign income taxes so withheld, each
Portfolio intends to operate so as to meet the requirements of the Code to pass
through to the shareholders credit for foreign income taxes paid. Although each
Portfolio intends to meet Code requirements to pass through credit for such
taxes, there can be no assurance that each Portfolio will be able to do so.
THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED HEREIN FOR GENERAL
INFORMATION ONLY. PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS
WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN THE PORTFOLIO.
PORTFOLIO TRANSACTIONS
The Investment Advisory Agreement authorizes the Adviser to select the
brokers or dealers that will execute the purchases and sales of investment
securities for the Portfolios and directs the Adviser to use its best efforts to
obtain the best available price and most favorable execution with respect to all
transactions for the Portfolios. The Fund has authorized the Adviser to pay
higher commissions in recognition of brokerage services which, in the opinion of
the Adviser, are necessary for the achievement of better execution, provided the
Adviser believes this to be in the best interest of the Fund.
Since shares of the Portfolios are not marketed through intermediary brokers
or dealers, it is not the Fund's practice to allocate brokerage or principal
business on the basis of sales of shares which may be made through such firms.
However, the Adviser may place portfolio orders with qualified broker-dealers
who recommend the Fund's portfolios or who act as agents in the purchase of
shares of the Fund's portfolios for their clients.
In purchasing and selling securities for the Portfolios, it is the Fund's
policy to seek to obtain quality execution at the most favorable prices, through
responsible broker-dealers. In selecting broker-dealers to execute the
securities transactions for the Portfolios, consideration will be given to such
factors as the price of the security, the rate of the commission, the size and
difficulty of the order, the reliability, integrity, financial condition,
general execution and operational capabilities of competing broker-dealers, and
the brokerage and research services which they provide to the Fund. Some
securities considered for investment by the Portfolios may also be appropriate
for other clients served by the Adviser. If purchase or sale of securities
consistent with the investment policies of the Portfolio and one or more of
these other clients served by the Adviser is considered at or about the same
time, transactions in such securities will be allocated among the Portfolios and
such other clients in a manner deemed fair and reasonable by the Adviser.
Although there is no specified formula for allocating such transactions, the
various allocation methods used by the Adviser, and the results of such
allocations, are subject to periodic review by the Fund's Board of Directors.
Subject to the overriding objective of obtaining the best possible execution
of orders, the Adviser may allocate a portion of the Portfolio brokerage
transactions to Morgan Stanley or broker affiliates of Morgan
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Stanley. In order for Morgan Stanley or its affiliates to effect any portfolio
transactions for the Fund, the commissions, fees or other remuneration received
by Morgan Stanley or such affiliates must be reasonable and fair compared to the
commissions, fees or other remuneration paid to other brokers in connection with
comparable transactions involving similar securities being purchased or sold on
a securities exchange during a comparable period of time. Furthermore, the Board
of Directors of the Fund, including a majority of those Directors who are not
"interested persons," as defined in the Investment Company Act of 1940 (the
"1940 Act") have adopted procedures which are reasonably designed to provide
that any commissions, fees or other remuneration paid to Morgan Stanley or such
affiliates are consistent with the foregoing standard.
Portfolio securities will not be purchased from or through, or sold to or
through, the Adviser or Morgan Stanley or any "affiliated persons," as defined
in the 1940 Act, of Morgan Stanley when such entities are acting as principals,
except to the extent permitted by law.
Although neither Portfolio will invest for short-term trading purposes,
investment securities may be sold from time to time without regard to the length
of time they have been held. The Emerging Markets Portfolio anticipates that,
under normal circumstances, its annual portfolio turnover rate will not exceed
50%. The Emerging Markets Debt Portfolio anticipates that, under normal
circumstances, its annual portfolio turnover rate will not exceed 100%. High
portfolio turnover involves correspondingly greater transaction costs which will
be borne directly by the respective Portfolio. In addition, high portfolio
turnover may result in more capital gains which would be taxable to the
shareholders of the respective Portfolio. The tables set forth in "Financial
Highlights" present the Portfolio's historical turnover rates.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
The Fund was organized as a Maryland corporation on June 16, 1988. The
Articles of Incorporation, as amended and restated, permit the Fund to issue up
to 34 billion shares of common stock, with $.001 par value per share. Pursuant
to the Fund's Articles of Incorporation, the Board of Directors may increase the
number of shares the Fund is authorized to issue without the approval of the
shareholders of the Fund. Subject to the notice period to shareholders with
respect to shares held by the shareholders, the Board of Directors has the power
to designate one or more classes of shares of common stock and to classify and
reclassify any unissued shares with respect to such classes. The shares of
common stock of each portfolio are currently classified into two classes, the
Class A shares and the Class B shares, except for the International Small Cap,
Money Market and Municipal Money Market Portfolios, which only offer Class A
shares.
The shares of the Portfolios, when issued, will be fully paid,
nonassessable, fully transferable and redeemable at the option of the holder.
The shares have no preference as to conversion, exchange, dividends, retirement
or other features and have no pre-emptive rights. The shares of each Portfolio
have non-cumulative voting rights, which means that the holders of more than 50%
of the shares voting for the election of Directors can elect 100% of the
Directors if they choose to do so. Persons or organizations owning 25% or more
of the outstanding shares of a Portfolio may be presumed to "control" (as that
term is defined in the 1940 Act) that Portfolio. Under Maryland law, the Fund is
not required to hold an annual meeting of its shareholders unless required to do
so under the 1940 Act.
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REPORTS TO SHAREHOLDERS
The Fund will send to its shareholders annual and semi-annual reports; the
financial statements appearing in annual reports are audited by independent
accountants. Monthly unaudited portfolio data is also available from the Fund
upon request.
In addition, the Adviser, or its agent, as Transfer Agent, will send to each
shareholder having an account directly with the Fund a monthly statement showing
transactions in the account, the total number of shares owned, and any dividends
or distributions paid.
CUSTODIAN
As of September 1, 1995, domestic securities and cash are held by Chase,
which replaced U.S. Trust as the Fund's domestic custodian. Chase is not an
affiliate of the Adviser or the Distributor. Morgan Stanley Trust Company,
Brooklyn, New York ("MSTC"), an affiliate of the Adviser and the Distributor,
acts as the Fund's custodian for foreign assets held outside the United States
and employs subcustodians approved by the Board of Directors of the Fund in
accordance with regulations of the Securities and Exchange Commission for the
purpose of providing custodial services for such assets. MSTC may also hold
certain domestic assets for the Fund. For more information on the custodians,
see "General Information -- Custody Arrangements" in the Statement of Additional
Information.
DIVIDEND DISBURSING AND TRANSFER AGENT
Chase Global Funds Services Company, 73 Tremont Street, Boston,
Massachusetts 02108-3913, acts as Dividend Disbursing and Transfer Agent for the
Fund.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP serves as independent accountants for the Fund and
audits its annual financial statements.
LITIGATION
The Fund is not involved in any litigation.
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<TABLE>
<CAPTION>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
EMERGING MARKETS AND EMERGING MARKETS DEBT PORTFOLIOS
P.O. BOX 2798, BOSTON, MA 02208-2798
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ACCOUNT REGISTRATION FORM
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<S> <C>
ACCOUNT INFORMATION If you need assistance in filling out this form
Fill in where applicable for the Morgan Stanley Institutional Fund, please
contact your Morgan Stanley representative or call
us toll free 1-(800)-548-7786. Please print all
items except signature, and mail to the Fund at the
address above.
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A) REGISTRATION
1. INDIVIDUAL 1. / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
First Name Initial Last Name
2. JOINT TENANTS 2. / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
(RIGHTS OF First Name Initial Last Name
SURVIVORSHIP / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
PRESUMED UNLESS First Name Initial Last Name
TENANCY IN COMMON
IS INDICATED)
- ---------------------------------------------------------------------------------------------------------------
3. CORPORATIONS, 3. / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
TRUSTS AND OTHERS
Please call the / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
Fund for additional
documents that may / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
be required to set
up account and to
authorize transactions.
Type of / / INCORPORATED / / UNINCORPORATED / / PARTNERSHIP / / UNIFORM GIFT/TRANSFER TO MINOR
Registration: ASSOCIATION (ONLY ONE CUSTODIAN AND MINOR PERMITTED)
/ / TRUST __________________________________ / / OTHER (Specify) ______________________________
- ---------------------------------------------------------------------------------------------------------------
B) MAILING ADDRESS Street or P.O. Box / / / / / / / / / / / / / / / / / / / / / / / / / / / /
Please fill in
completely, including City / / / / / / / / / / / / / State / / / Zip / / / / / /-/ / / / / / / /
telephone number(s).
Home Business
Telephone No./ / / /-/ / / /-/ / / / / Telephone No./ / / /-/ / / /-/ / / /
/ / United States / / Resident / /Non-Resident Alien:
Citizen Alien Indicate Country of Residence _________
- ---------------------------------------------------------------------------------------------------------------
C) TAXPAYER PART 1. Enter your Taxpayer C) IMPORTANT TAX INFORMATION
IDENTIFICATION Identification Number. For most You (as a payee) are required by
NUMBER individual taxpayers, this is your law to provide us (as payer) with
If the account is in Social Security Number. your correct Taxpayer Identification
more than one name, TAXPAYER IDENTIFICATION NUMBER Number. Accounts that have a missing
CIRCLE THE NAME OF THE / / / /-/ / / / / / / / / or incorrect Taxpayer Identification
PERSON WHOSE TAXPAYER OR Number will be subject to backup
IDENTIFICATION NUMBER SOCIAL SECURITY NUMBER withholding at a 31% rate on dividends,
IS PROVIDED IN SECTION / / / /-/ / /-/ / / / / distributions and other payments.
A) ABOVE. If no name PART 2. BACKUP WITHHOLDING If you have not provided us with
is circled, the number / / Check this box if you are your correct taxpayer identification
will be considered to be NOT subject to Backup number, you may be subject to
that of the last name Withholding under the a $50 penalty imposed by the Internal
listed. For Custodian provisions of Section Revenue Service.
account of a minor 3406(a)(1)(C) of the Internal Backup withholding is not an
(Uniform Gift/Transfer Revenue Code. additional tax; the tax liability of
to Minor Act), give the persons subject to backup withholding
Social Security Number will be reduced by the amount of tax
of the minor. withheld. If withholding results in
an overpayment of taxes, a refund
may be obtained. You may be notified
that you are subject to backup
withholding under Section 3406(a)(1)(C)
of the Internal Revenue Code because you
have underreported interest or dividends
or you were required to but failed to
file a return which would have included a
reportable interest or dividend payment. IF
YOU HAVE NOT BEEN SO NOTIFIED, CHECK THE
BOX IN PART 2 AT LEFT.
- ---------------------------------------------------------------------------------------------------------------
D) PORTFOLIO AND For Purchase of the following Portfolio(s):
CLASS SELECTION Emerging Markets Portfolio / / Class A Shares $____ / / Class B Shares $____
(Class A shares Emerging Markets Debt Portfolio / / Class A Shares $____ / / Class B Shares $____
minimum $500,000
for each Portfolio Total Initial Investment $_____________
and Class B shares
minimum $100,000 for
each Portfolio).
Please indicate
Portfolio, class and
amount.
- ---------------------------------------------------------------------------------------------------------------
E) METHOD OF Payment by:
INVESTMENT / / Check (MAKE CHECK PAYABLE TO MORGAN STANLEY INSTITUTIONAL FUND, INC.--SMALL CAP VALUE EQUITY, VALUE EQUITY
Please AND BALANCED PORTFOLIOS)
indicate
manner of / / Exchange $____________ From________________ / / / / / / / / / / /-/ /
payment. Name of Portfolio Account No.
/ / Account previously established by: / / Phone exchange / / Wire on_____/ / / / / / / / / / / /-/ /
Date Account No. (Check
(Previously assigned by the Fund) Digit)
<PAGE>
- ---------------------------------------------------------------------------------------------------------------
F) DISTRIBUTION Income dividends and capital gains distributions (if any) will
OPTION be reinvested in additional shares unless either box below is
checked.
/ / Income dividends to be paid in cash, capital
gains distributions (if any) in shares.
/ / Income dividends and capital gains distributions
(if any) to be paid in cash.
- ---------------------------------------------------------------------------------------------------------------
G) TELEPHONE / / I/we hereby authorize the Fund and its ______________________ ________________
REDEMPTION agents to honor any telephone requests Name of COMMERCIAL Bank Bank Account No.
Please select at time of to wire redemption proceeds to the (Not Savings Bank)
initial application if you commercial bank indicated at rightand/or
wish to redeem shares by mail redemption proceeds to the name and ________________
telephone. A SIGNATURE address in which my/our fund account is Bank ABA No.
GUARANTEE IS REQUIRED IF registered if such requests are believed
BANK ACCOUNT IS NOT to be authentic. _________________________________________________
REGISTERED IDENTICALLY TO The Fund and the Fund's Transfer Agent will Name(s) in which your BANK Account is Established
YOUR FUND ACCOUNT. employ reasonable procedures to confirm that
instructions communicated by telephone are _________________________________________________
TELEPHONE REQUESTS FOR genuine. These procedures include requiring Bank's Street Address
REDEMPTIONS WILL NOT BE the investor to provide certain personal
HONORED UNLESS THE BOX IS identification information at the time an _________________________________________________
CHECKED. account is opened and prior to effecting each City State Zip
transaction requested by telephone. In addition,
all telephone transaction requests will be recorded
and investors may be required to provide additional
telecopied written instructions of transaction
requests. Neither the Fund nor the Transfer Agent will
be responsible for any loss, liability, cost or expense
for following instructions received by telephone that
it reasonably believes to be genuine.
- ---------------------------------------------------------------------------------------------------------------
H) INTERESTED PARTY
OPTION
In addition to the account _________________________________________________________________
statement sent to my/our Name
registered address, I/we _________________________________________________________________
hereby authorize the fund
to mail duplicate _________________________________________________________________
statements to the name and Address
address provided at right.
_________________________________________________________________
City State Zip Code
- ---------------------------------------------------------------------------------------------------------------
I) DEALER
INFORMATION _______________________ _______________________________ ___________
Representative Name Representative No. Branch No.
- ---------------------------------------------------------------------------------------------------------------
J) SIGNATURE OF The undersigned certify(ies) that I/we have full authority and legal
ALL HOLDERS capacity to purchase and redeem shares of the Fund and affirm that I/we
AND TAXPAYER have received a current Prospectus of the Morgan Stanley Institutional
CERTIFICATION Fund, Inc. and agree to be bound by its terms. UNDER THE PENALTIES OF
Sign Here > PERJURY, I/WE CERTIFY THAT THE INFORMATION PROVIDED IN SECTION C)
ABOVE IS TRUE, CORRECT AND COMPLETE.
(X) (X)
__________________________________ ______________________________________
Signature Date Signature Date
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
(This page has been left blank intentionally.)
<PAGE>
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND OR THE DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER BY THE FUND OR THE DISTRIBUTOR TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION.
--------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
PAGE
----
Fund Expenses..................................... 2
Financial Highlights.............................. 4
Prospectus Summary................................ 7
Investment Objectives and Policies................ 11
Additional Investment Information................. 15
Investment Limitations............................ 24
Management of the Fund............................ 25
Purchase of Shares................................ 27
Redemption of Shares.............................. 31
Shareholder Services.............................. 33
Valuation of Shares............................... 34
Performance Information........................... 35
Dividends and Capital Gains Distributions......... 35
Taxes............................................. 36
Portfolio Transactions............................ 37
General Information............................... 38
Account Registration Form
</TABLE>
EMERGING MARKETS PORTFOLIO
EMERGING MARKETS DEBT PORTFOLIO
PORTFOLIOS OF THE
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
Common Stock
($.001 PAR VALUE)
-------------
PROSPECTUS
-------------
Investment Adviser
Morgan Stanley
Asset Management Inc.
Distributor
Morgan Stanley & Co.
Incorporated
- ---------------------------------
- ---------------------------------
- ---------------------------------
- ---------------------------------
<PAGE>
- --------------------------------------------------------------------------------
P R O S P E C T U S
-------------------------------------------------------------------------
EQUITY GROWTH PORTFOLIO
EMERGING GROWTH PORTFOLIO
MICROCAP PORTFOLIO
AGGRESSIVE EQUITY PORTFOLIO
PORTFOLIOS OF THE
MORGAN STANLEY INSTITUTIONAL FUND, INC.
P.O. BOX 2798, BOSTON, MASSACHUSETTS 02208-2798
FOR INFORMATION CALL 1-800-548-7786
----------------
Morgan Stanley Institutional Fund, Inc. (the "Fund") is a no-load, open-end
management investment company, or mutual fund, which offers redeemable shares in
a series of diversified and non-diversified investment portfolios
("portfolios"). The Fund currently consists of twenty-eight portfolios
representing a broad range of investment choices. The Fund is designed to
provide clients with attractive alternatives for meeting their investment needs.
This prospectus (the "Prospectus") pertains to the Class A and the Class B
shares of the Equity Growth, Emerging Growth, MicroCap and Aggressive Equity
Portfolios (the "Portfolios"). On January 2, 1996, the Portfolios began offering
two classes of shares, the Class A shares and the Class B shares, except for the
Money Market, Municipal Money Market and International Small Cap Portfolios
which only offer Class A Shares. All shares of the Portfolios owned prior to
January 2, 1996 were redesignated Class A shares on January 2, 1996. The Class A
and Class B shares currently offered by the Portfolios have different minimum
investment requirements and fund expenses. Shares of the portfolios are offered
with no sales charge or exchange or redemption fee (with the exception of the
International Small Cap Portfolio).
The EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation by
investing primarily in growth-oriented equity securities of medium and large
capitalization corporations.
The EMERGING GROWTH PORTFOLIO seeks long-term capital appreciation by
investing primarily in growth-oriented equity securities of small-to-medium
sized corporations.
The MICROCAP PORTFOLIO seeks long-term capital appreciation by investing
primarily in growth-oriented equity securities of small corporations.
The AGGRESSIVE EQUITY PORTFOLIO is a non-diversified portfolio that seeks
long-term capital appreciation by investing primarily in corporate equity and
equity-linked securities.
INVESTORS SHOULD NOTE THAT EACH OF THE EQUITY GROWTH AND AGGRESSIVE EQUITY
PORTFOLIOS MAY INVEST UP TO 10% OF ITS TOTAL ASSETS IN RESTRICTED SECURITIES.
INVESTMENTS IN RESTRICTED SECURITIES IN EXCESS OF 5% OF A PORTFOLIO'S TOTAL
ASSETS MAY BE CONSIDERED A SPECULATIVE ACTIVITY, MAY INVOLVE GREATER RISK AND
MAY INCREASE THE PORTFOLIO'S EXPENSES.
The Fund is designed to meet the investment needs of discerning investors
who place a premium on quality and personal service. With Morgan Stanley Asset
Management Inc. as Adviser and Administrator (the "Adviser" and the
"Administrator"), and with Morgan Stanley & Co. Incorporated ("Morgan Stanley")
as Distributor, the Fund makes available to institutional investors and high net
worth individual investors a series of portfolios which benefit from the
investment expertise and commitment to excellence associated with Morgan Stanley
and its affiliates.
This Prospectus is designed to set forth concisely the information about the
Fund that a prospective investor should know before investing and it should be
retained for future reference. The Fund offers additional portfolios which are
described in other prospectuses and under "Prospectus Summary" below. The Fund
currently offers the following portfolios: (i) GLOBAL AND INTERNATIONAL EQUITY
- -- Active Country Allocation, Asian Equity, Emerging Markets, European Equity,
Global Equity, Gold, International Equity, International Magnum, International
Small Cap, Japanese Equity and Latin American Portfolios; (ii) U.S. EQUITY --
Aggressive Equity, Emerging Growth, Equity Growth, MicroCap, Small Cap Value
Equity, Value Equity and U.S. Real Estate Portfolios; (iii) EQUITY AND FIXED
INCOME -- Balanced Portfolio; (iv) FIXED INCOME -- Emerging Markets Debt, Fixed
Income, Global Fixed Income, High Yield, Mortgage-Backed Securities and
Municipal Bond Portfolios; and (v) MONEY MARKET -- Money Market and Municipal
Money Market Portfolios. Additional information about the Fund is contained in a
"Statement of Additional Information" dated May 1, 1996, which is incorporated
herein by reference. The Statement of Additional Information and the
prospectuses pertaining to the other portfolios of the Fund are available upon
request and without charge by writing or calling the Fund at the address and
telephone number set forth above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1996.
<PAGE>
FUND EXPENSES
The following table illustrates the expenses and fees that a shareholder of
the Portfolios indicated below will incur:
<TABLE>
<CAPTION>
EQUITY EMERGING AGGRESSIVE
GROWTH GROWTH MICROCAP EQUITY
SHAREHOLDER TRANSACTION EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Maximum Sales Load Imposed on Purchases
Class A.............................................. None None None None
Class B.............................................. None None None None
Maximum Sales Load Imposed on Reinvested Dividends
Class A.............................................. None None None None
Class B.............................................. None None None None
Deferred Sales Load
Class A.............................................. None None None None
Class B.............................................. None None None None
Redemption Fees
Class A.............................................. None None None None
Class B.............................................. None None None None
Exchange Fees
Class A.............................................. None None None None
Class B.............................................. None None None None
</TABLE>
<TABLE>
<CAPTION>
EQUITY EMERGING AGGRESSIVE
GROWTH GROWTH MICROCAP EQUITY
ANNUAL FUND OPERATING EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fee (Net of Fee Waivers)*
Class A.............................................. 0.52% 0.99% 1.05%+ 0.21%
Class B.............................................. 0.52% 0.99% 1.05%+ 0.21%
12b-1 Fees
Class A.............................................. None None None None
Class B.............................................. 0.25% 0.25% 0.25%+ 0.25%
Other Expenses
Class A.............................................. 0.28% 0.26% 0.45%+ 0.79%
Class B.............................................. 0.28% 0.26% 0.45%+ 0.79%
----------- ----------- ----------- -----------
Total Operating Expenses (Net of Fee Waivers)*
Class A.............................................. 0.80% 1.25% 1.50%+ 1.00%
Class B.............................................. 1.05% 1.50% 1.75%+ 1.25%
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
- ------------------------
*The Adviser has agreed to waive its management fees and/or reimburse each
Portfolio, if necessary, if such fees would cause any of the total annual
operating expenses of the Portfolios to exceed a specified percentage of their
respective average daily net assets. Set forth below, for each Portfolio, are
the management fees and total operating expenses absent such fee waivers and/or
expense reimbursements as a percent of average daily net assets of the Class A
shares and Class B shares, respectively, of each Portfolio.
2
<PAGE>
<TABLE>
<CAPTION>
TOTAL OPERATING
EXPENSES ABSENT FEE
WAIVERS
MANAGEMENT FEES ABSENT ----------------------
PORTFOLIO FEE WAIVERS CLASS A CLASS B+
- ----------------------------------------------------------- ------------------------- --------- -----------
<S> <C> <C> <C>
Equity Growth.............................................. 0.60% 0.88% 1.13%
Emerging Growth............................................ 1.00% 1.26% 1.51%
MicroCap................................................... 1.25% 1.50%+ 1.75%
Aggressive Equity.......................................... 0.80% 1.59% 1.84%
</TABLE>
- ------------------------------
+ Estimated.
These reductions became or will become effective as of the inception of each
Portfolio. As a result of these reductions, the Management Fees stated above are
lower than the contractual fees stated under "Management of the Fund." For
further information on Fund expenses, see "Management of the Fund."
The purpose of the table above is to assist the investor in understanding
the various expenses that an investor in the Portfolios will bear directly or
indirectly. The Class A expenses and fees for the Equity Growth and Emerging
Growth Portfolios are based on actual figures for the fiscal year ended December
31, 1995. The Class A expenses and fees for the MicroCap Portfolio are based on
estimates, assuming that the average daily net assets of the Class A shares of
the MicroCap Portfolio will be $50,000,000. The Class B expenses and fees for
each Portfolio are based on estimates, assuming that the average daily net
assets of the Class B shares of each Portfolio will be $50,000,000. "Other
Expenses" include Board of Directors' fees and expenses, amortization of
organizational costs, filing fees, professional fees and costs for shareholder
reports. Due to the continuous nature of Rule 12b-1 fees, long term Class B
shareholders may pay more than the equivalent of the maximum front-end charges
otherwise permitted by the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. ("NASD").
3
<PAGE>
The following example illustrates the expenses that you would pay on a
$1,000 investment assuming (1) a 5% annual rate of return and (2) redemption at
the end of each time period. As noted in the table above, the Portfolios charge
no redemption fees of any kind. The example is based on total operating expenses
of the Portfolios after fee waivers.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Equity Growth Portfolio
Class A.......................................................... $ 8 $ 26 $ 44 $ 99
Class B.......................................................... 11 33 58 128
Emerging Growth Portfolio
Class A.......................................................... 13 40 69 151
Class B.......................................................... 15 47 82 179
MicroCap Portfolio
Class A.......................................................... 15 47 * *
Class B.......................................................... 18 55 * *
Aggressive Equity Portfolio
Class A.......................................................... 10 32 55 122
Class B.......................................................... 13 40 69 151
</TABLE>
- ------------------------------
* Because the MicroCap Portfolio has not yet commenced operations the Fund has
not projected expenses beyond the 3-year period shown for the Portfolio.
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
The Fund intends to comply with all state laws that restrict investment
company expenses. Currently, the most restrictive state law requires that the
aggregate annual expenses of an investment company shall not exceed two and
one-half percent (2 1/2%) of the first $30 million of average net assets, two
percent (2%) of the next $70 million of average net assets, and one and one-half
percent (1 1/2%) of the remaining net assets of such investment company.
The Adviser has agreed to a reduction in the amounts payable to it, and to
reimburse the Portfolios, if necessary, if in any fiscal year the sum of the
Portfolios' expenses exceeds the limit set by applicable state law.
4
<PAGE>
FINANCIAL HIGHLIGHTS
The following table provides financial highlights for the Class A shares of
the Equity Growth, Emerging Growth and Aggressive Equity Portfolios for each of
the periods presented. The audited financial highlights for the Class A shares
for the fiscal year ended December 31, 1995 are part of the Fund's financial
statements which appear in the Fund's December 31, 1995 Annual Report to
Shareholders and which are included in the Fund's Statement of Additional
Information. The Portfolios' financial highlights for each of the periods in the
five years ended December 31, 1995 have been audited by Price Waterhouse LLP,
whose unqualified report thereon is also included in the Statement of Additional
Information. Additional performance information for the Class A shares is
included in the Annual Report. The Annual Report and the financial statements
therein, along with the Statement of Additional Information, are available at no
cost from the Fund at the address and telephone number noted on the cover page
of this Prospectus. Financial highlights are not available for the MicroCap
Portfolio nor for the new Class B shares since they were not offered as of
December 31, 1995. Subsequent to October 31, 1992 (the Fund's prior fiscal year
end), the Fund changed its fiscal year end to December 31. The following
information should be read in conjunction with the financial statements and
notes thereto.
5
<PAGE>
EQUITY GROWTH PORTFOLIO
<TABLE>
<CAPTION>
APRIL 2, TWO MONTHS
1991* TO YEAR ENDED ENDED YEAR ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1991 1992 1992 1993 1994 1995
----------- ----------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD............................. $ 10.00 $ 10.66 $ 11.44 $ 11.88 $ 12.14 $ 12.02
----------- ----------- ------------- ------------- ------------- -------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1)......... 0.05 0.16 0.03 0.22 0.17 0.22
Net Realized and Unrealized Gain
on Investments................... 0.61 0.82 0.41 0.28 0.21 4.93
----------- ----------- ------------- ------------- ------------- -------------
Total from Investment
Operations....................... 0.66 0.98 0.44 0.50 0.38 5.15
----------- ----------- ------------- ------------- ------------- -------------
DISTRIBUTIONS
Net Investment Income............. -- (0.20) -- (0.23) (0.13) (0.28)
In Excess of Net Investment
Income........................... -- -- -- (0.01) -- --
Net Realized Gain................. -- -- -- -- (0.37) (2.75)
----------- ----------- ------------- ------------- ------------- -------------
Total Distributions............... -- (0.20) -- (0.24) (0.50) (3.03)
----------- ----------- ------------- ------------- ------------- -------------
NET ASSET VALUE, END OF PERIOD...... $ 10.66 $ 11.44 $ 11.88 $ 12.14 $ 12.02 $ 14.14
----------- ----------- ------------- ------------- ------------- -------------
----------- ----------- ------------- ------------- ------------- -------------
TOTAL RETURN........................ 6.60% 9.26% 3.85% 4.33% 3.26% 45.02%
----------- ----------- ------------- ------------- ------------- -------------
----------- ----------- ------------- ------------- ------------- -------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands)........................ $ 18,139 $ 36,558 $ 45,985 $ 73,789 $ 97,259 $ 158,112
Ratio of Expenses to Average Net
Assets (1)(2)...................... 0.80%** 0.80% 0.80%** 0.80% 0.80% 0.80%
Ratio of Net Investment Income to
Average Net Assets (1)(2).......... 2.34%** 1.73% 1.93%** 1.59% 1.44% 1.57%
Portfolio Turnover Rate............. 3% 38% 1% 172% 146% 186%
- ------------------------------
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income............. $ 0.03 $ 0.02 $ 0.01 $ 0.02 $ 0.01 $ 0.01
Ratios before expense limitation:
Expenses to Average Net
Assets........................ 1.37%** 1.01% 1.11%** 0.93% 0.89% 0.88%
Net Investment Income to
Average Net Assets............ 1.77%** 1.52% 1.62%** 1.46% 1.35% 1.49%
</TABLE>
(2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled
to receive a management fee calculated at an annual rate of 0.60% of the
average daily net assets of the Equity Growth Portfolio. The Adviser has
agreed to waive a portion of this fee and/or reimburse expenses of the
Equity Growth Portfolio to the extent that the total operating expenses of
the Equity Growth Portfolio exceed 0.80% of the average daily net assets of
the Class A shares and 1.05% of the average daily net assets of the Class B
shares. In the period ended October 31, 1991, the year ended October 31,
1992, the two months ended December 31, 1992, the years ended December 31,
1993, 1994 and 1995, the Adviser waived management fees and/or reimbursed
expenses totalling $23,000, $51,000, $22,000, $68,000, $83,000 and $105,000,
respectively, for the Equity Growth Portfolio.
* Commencement of Operations.
** Annualized.
6
<PAGE>
EMERGING GROWTH PORTFOLIO
<TABLE>
<CAPTION>
NOVEMBER 1, TWO MONTHS
1989* TO YEAR ENDED YEAR ENDED ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1990 1991++ 1992 1992 1993 1994
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD....................... $ 10.00 $ 9.03 $ 16.18 $ 14.97 $ 16.22 $ 16.22
------------- ------------- ------------- ------------- ------------- -------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income/
(Loss) (1)................. 0.08 -- (0.09) (0.01) (0.11) (0.09)
Net Realized and Unrealized
Gain/(Loss) on
Investments................ (1.00) 7.19 (1.12) 1.26 0.11 (0.01)
------------- ------------- ------------- ------------- ------------- -------------
Total from Investment
Operations................. (0.92) 7.19 (1.21) 1.25 0.00 (0.10)
------------- ------------- ------------- ------------- ------------- -------------
DISTRIBUTIONS
Net Investment Income....... (0.05) (0.04) -- -- -- --
------------- ------------- ------------- ------------- ------------- -------------
NET ASSET VALUE, END OF
PERIOD....................... $ 9.03 $ 16.18 $ 14.97 $ 16.22 $ 16.22 $ 16.12
------------- ------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- ------------- -------------
TOTAL RETURN.................. (9.27)% 79.84% (7.48)% 8.35% 0.00% (0.62)%
------------- ------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- ------------- -------------
RATIO AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands).................. $ 11,261 $ 54,364 $ 80,156 $ 94,161 $ 103,621 $ 117,669
Ratio of Expenses to Average
Net Assets (1)(2)............ 1.26%** 1.25% 1.25% 1.25%** 1.25% 1.25%
Ratio of Net Investment
Income/ (Loss) to Average Net
Assets (1)(2)................ 0.64%** 0.00% (0.66)% (0.68)%** (0.77)% (0.61)%
Portfolio Turnover Rate....... 19% 2% 17% 1% 25% 24%
- ------------------------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income....... $ 0.01 $ 0.02 $ 0.01 $ 0.00 $ 0.01 $ 0.002
Ratios before expense
limitation:
Expenses to Average Net
Assets.................. 1.64% 1.39% 1.29% 1.36%** 1.31% 1.26%
Net Investment Income
(Loss) to Average Net
Assets.................. 0.24% (0.14)% (0.71)% (0.79)%** (0.83)% (0.62)%
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995
-------------
<S> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD....................... $ 16.12
-------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income/
(Loss) (1)................. (0.18)
Net Realized and Unrealized
Gain/(Loss) on
Investments................ 5.55
-------------
Total from Investment
Operations................. 5.37
-------------
DISTRIBUTIONS
Net Investment Income....... --
-------------
NET ASSET VALUE, END OF
PERIOD....................... $ 21.49
-------------
-------------
TOTAL RETURN.................. 33.31%
-------------
-------------
RATIO AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands).................. $ 119,378
Ratio of Expenses to Average
Net Assets (1)(2)............ 1.25%
Ratio of Net Investment
Income/ (Loss) to Average Net
Assets (1)(2)................ (0.76)%
Portfolio Turnover Rate....... 25%
- ------------------------------
(1) Effect of voluntary expens
Per share benefit to net
investment income....... $ 0.003
Ratios before expense
limitation:
Expenses to Average Net
Assets.................. 1.26%
Net Investment Income
(Loss) to Average Net
Assets.................. (0.77)%
</TABLE>
(2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled
to receive a management fee calculated at an annual rate of 1.00% of the
average daily net assets of the Emerging Growth Portfolio. The Adviser has
agreed to waive a portion of this fee and/or reimburse expenses of the
Emerging Growth Portfolio to the extent that the total operating expenses of
the Emerging Growth Portfolio exceed 1.25% of the average daily net assets
of the Class A shares and 1.50% of the average daily net assets of the Class
B shares. In the period ended October 31, 1990, the years ended October 31,
1991 and 1992, the two months ended December 31, 1992, the years ended
December 31, 1993, 1994, and 1995 the Adviser waived management fees and/or
reimbursed expenses totalling $28,000, $41,000, $31,000, $18,000, $51,000,
$16,000 and $18,000, respectively, for the Emerging Growth Portfolio.
* Commencement of Operations.
++ Per share amounts for the year ended October 31, 1991 are based on average
outstanding shares.
** Annualized.
7
<PAGE>
AGGRESSIVE EQUITY PORTFOLIO
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 8, 1995* TO
DECEMBER 31, 1995
------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.......................................................... $ 10.00
-------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1)................................................................... 0.15
Net Realized and Unrealized Gain on Investments............................................. 3.95
-------
Total from Investment Operations.......................................................... 4.10
-------
DISTRIBUTIONS
Net Investment Income....................................................................... (0.15)
Net Realized Gain........................................................................... (1.78)
-------
Total Distributions......................................................................... (1.93)
-------
NET ASSET VALUE, END OF PERIOD................................................................ $ 12.17
-------
-------
TOTAL RETURN.................................................................................. 41.25%
-------
-------
RATIO AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)......................................................... $ 28,548
Ratio of Expenses to Average Net Assets (1)(2)................................................ 1.00%**
Ratio of Net Investment Income to Average Net Assets (1)(2)................................... 1.64%**
Portfolio Turnover Rate....................................................................... 309%
- ------------------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net investment income............................................... $ 0.06
Ratios before expense limitation:
Expenses to Average Net Assets........................................................... 1.59%**
Net Investment Income to Average Net Assets.............................................. 1.05%**
</TABLE>
(2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled
to receive a management fee calculated at an annual rate of 0.80% of the
average daily net assets of the Aggressive Equity Portfolio. The Adviser has
agreed to waive a portion of this fee and/or reimburse expenses of the
Aggressive Equity Portfolio to the extent that the total operating expenses
of the Aggressive Equity Portfolio exceed 1.00% of the average daily net
assets of the Class A Shares and 1.25% of the average daily net assets of
the Class B Shares. In the period ended December 31, 1995, the Adviser
waived management fees and/or reimbursed expenses totalling $96,000 for the
Aggressive Equity Portfolio.
* Commencement of Operations
** Annualized
8
<PAGE>
PROSPECTUS SUMMARY
THE FUND
The Fund consists of twenty-eight portfolios, offering institutional
investors and high net worth individual investors a broad range of investment
choices coupled with the advantages of a no-load mutual fund with Morgan Stanley
and its affiliates providing customized services as Adviser, Administrator and
Distributor. Each portfolio offers Class A shares and except the International
Small Cap, Money Market and Municipal Money Market Portfolios, offers Class B
shares. Each portfolio has its own investment objective and policies designed to
meet its specific goals. The investment objective of each Portfolio described in
this Prospectus is as follows:
- The EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation by
investing primarily in growth-oriented equity securities of medium and
large capitalization companies.
- The EMERGING GROWTH PORTFOLIO seeks long-term capital appreciation by
investing primarily in growth-oriented equity securities of small- to
medium-sized corporations.
- The MICROCAP PORTFOLIO seeks long-term capital appreciation by investing
primarily in growth-oriented equity securities of small corporations.
- The AGGRESSIVE EQUITY PORTFOLIO is a non-diversified portfolio that seeks
capital appreciation by investing primarily in corporate equity and
equity-linked securities.
The other portfolios of the Fund are described in other Prospectuses which
may be obtained from the Fund at the address and phone number noted on the cover
page of this Prospectus. The objectives of these other portfolios are listed
below:
GLOBAL AND INTERNATIONAL EQUITY:
- The ACTIVE COUNTRY ALLOCATION PORTFOLIO seeks long-term capital
appreciation by investing in accordance with country weightings determined
by the Adviser in equity securities of non-U.S. issuers which, in the
aggregate, replicate broad country indices.
- The ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Asian issuers.
- The CHINA GROWTH PORTFOLIO seeks to provide long-term capital appreciation
by investing primarily in equity securities of issuers in The People's
Republic of China, Hong Kong and Taiwan.
- The EMERGING MARKETS PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of emerging country issuers.
- The EUROPEAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of European issuers.
- The GLOBAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of issuers throughout the world,
including U.S. issuers.
- The GOLD PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of foreign and domestic issuers engaged in
gold-related activities.
- The INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers.
9
<PAGE>
- The INTERNATIONAL SMALL CAP PORTFOLIO seeks long-term capital appreciation
by investing primarily in equity securities of non-U.S. issuers with
equity market capitalizations of less than $1 billion.
- The JAPANESE EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Japanese issuers.
- The LATIN AMERICAN PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Latin American issuers and
debt securities issued or guaranteed by Latin American governments or
governmental entities.
- The INTERNATIONAL MAGNUM PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers in accordance
with EAFE country (as defined in "Investment Objective and Policies"
below) weightings determined by the Adviser.
U.S. EQUITY:
- The SMALL CAP VALUE EQUITY PORTFOLIO seeks high long-term total return by
investing in undervalued equity securities of small- to medium-sized
companies.
- The U. S. REAL ESTATE PORTFOLIO seeks to provide above average current
income and long-term capital appreciation by investing primarily in equity
securities of companies in the U.S. real estate industry, including real
estate investment trusts.
- The VALUE EQUITY PORTFOLIO seeks high total return by investing in equity
securities which the Adviser believes to be undervalued relative to the
stock market in general at the time of purchase.
EQUITY AND FIXED INCOME:
- The BALANCED PORTFOLIO seeks high total return while preserving capital by
investing in a combination of undervalued equity securities and fixed
income securities.
FIXED INCOME:
- The EMERGING MARKETS DEBT PORTFOLIO seeks high total return by investing
primarily in debt securities of government, government-related and
corporate issuers located in emerging countries.
- The FIXED INCOME PORTFOLIO seeks to produce a high total return consistent
with the preservation of capital by investing in a diversified portfolio
of fixed income securities.
- The GLOBAL FIXED INCOME PORTFOLIO seeks to produce an attractive real rate
of return while preserving capital by investing in fixed income securities
of issuers throughout the world, including U.S. issuers.
- The HIGH YIELD PORTFOLIO seeks to maximize total return by investing in a
diversified portfolio of high yield fixed income securities that offer a
yield above that generally available on debt securities in the three
highest rating categories of the recognized rating services.
- The MORTGAGE-BACKED SECURITIES Portfolio seeks to produce as high a level
of current income as is consistent with the preservation of capital by
investing primarily in a variety of investment-grade mortgage-backed
securities.
- The MUNICIPAL BOND PORTFOLIO seeks to produce a high level of current
income consistent with preservation of principal through investment
primarily in municipal obligations, the interest on which is exempt from
federal income tax.
10
<PAGE>
MONEY MARKET:
- The MONEY MARKET PORTFOLIO seeks to maximize current income and preserve
capital while maintaining high levels of liquidity through investing in
high quality money market instruments with remaining maturities of one
year or less.
- The MUNICIPAL MONEY MARKET PORTFOLIO seeks to maximize current tax-exempt
income and preserve capital while maintaining high levels of liquidity
through investing in high quality money market instruments with remaining
maturities of one year or less which are exempt from federal income tax.
INVESTMENT MANAGEMENT
Morgan Stanley Asset Management Inc., a wholly owned subsidiary of Morgan
Stanley Group Inc., which, together with its affiliated asset management
companies, at December 31, 1995 had approximately $57.4 billion in assets under
management as an investment manager or as a fiduciary adviser, acts as
investment adviser to the Fund and each of its portfolios. See "Management of
the Fund -- Investment Adviser" and "Management of the Fund -- Administrator."
HOW TO INVEST
Class A shares of each Portfolio are offered directly to investors at net
asset value with no sales commission or 12b-1 charges. Class B shares of each
Portfolio are offered at net asset value with no sales commission, but with a
12b-1 fee, which is accrued daily and paid quarterly, equal to 0.25% of the
Class B shares' average daily net assets on an annualized basis. Share purchases
may be made by sending investments directly to the Fund or through the
Distributor. Shares in a Portfolio account opened prior to January 2, 1996
(each, a "Pre-1996 Account") were designated Class A shares on January 2, 1996.
For a Portfolio account opened on or after January 2, 1996 (a "New Account"),
the minimum initial investment is $500,000 for Class A shares and $100,000 for
Class B shares. Certain exceptions to the foregoing minimums apply to (1) shares
in a Pre-1996 Account with a value of $100,000 or more on March 1, 1996 (a
"Grandfathered Class A Account"); (2) Portfolio accounts held by officers of the
Adviser and its affiliates; and (3) certain advisory or asset allocation
accounts, such as Total Funds Management accounts, managed by Morgan Stanley or
its affiliates, including the Adviser ("Managed Accounts"). The Adviser reserves
the right in its sole discretion to determine which of such advisory or asset
allocation accounts shall be Managed Accounts. For information regarding Managed
Accounts, please contact your Morgan Stanley account representative or the Fund
at the telephone number provided on the cover of this Prospectus. Shares in a
Pre-1996 Account with a value of less than $100,000 on March 1, 1996 (a
"Grandfathered Class B Account") converted to Class B shares on March 1, 1996.
The minimum investment levels may be waived at the discretion of the Adviser for
(i) certain employees and customers of Morgan Stanley or its affiliates and
certain trust departments, brokers, dealers, agents, financial planners,
financial services firms, or investment advisers that have entered into an
agreement with Morgan Stanley or its affiliates; and (ii) retirement and
deferred compensation plans and trusts used to fund such plans, including, but
not limited to, those defined in Section 401(a), 403(b) or 457 of the Internal
Revenue Code of 1986, as amended, and "rabbi trusts". See "Purchase of Shares --
Minimum Investment and Account Sizes; Conversion from Class A to Class B
Shares."
11
<PAGE>
The minimum subsequent investment for each Portfolio account is $1,000
(except for automatic reinvestment of dividends and capital gains distributions
for which there is no minimum). Such subsequent investments will be applied to
purchase additional shares in the same class held by a shareholder in a
Portfolio account. See "Purchase of Shares -- Additional Investments."
HOW TO REDEEM
Class A shares or Class B shares of each Portfolio may be redeemed at any
time, without cost, at the net asset value per share of shares of the applicable
class next determined after receipt of the redemption request. The redemption
price may be more or less than the purchase price. Certain redemptions may cause
involuntary redemption or automatic conversion. Class A or Class B shares held
in New Accounts are subject to involuntary redemption if shareholder
redemption(s) of such shares reduces the value of such account to less than
$100,000 for a continuous 60-day period. Involuntary redemption does not apply
to Managed Accounts, Grandfathered Class A Accounts and Grandfathered Class B
Accounts, regardless of the value of such accounts. Class A shares in a New
Account will convert to Class B shares if shareholder redemption(s) of such
shares reduces the value of such account to less than $500,000 for a continuous
60-day period. Class B shares in a New Account will convert to Class A shares if
shareholder purchases of additional Class B shares or market activity cause the
value of Class B shares in the New Account to increase to $500,000 or more. See
"Purchase of Shares -- Minimum Account Sizes and Involuntary Redemption of
Shares" and "Redemption of Shares."
RISK FACTORS
The investment policies of the Portfolios entail certain risks and
considerations of which an investor should be aware. Because the Emerging Growth
and MicroCap Portfolios seek long-term capital appreciation by investing
primarily in small- to medium-sized companies and small companies, respectively,
both of which types of companies are more vulnerable to financial and other
risks than larger, more established companies, investments in these Portfolios
may involve a higher degree of risk and price volatility than the general equity
markets. The Aggressive Equity Portfolio may invest in small-to medium-sized
companies to a lesser extent. The Equity Growth, Emerging Growth, MicroCap and
Aggressive Equity Portfolios may invest in securities of foreign issuers, which
are subject to certain risks not typically associated with domestic securities.
See "Investment Objectives and Policies" and "Additional Investment
Information." In addition, the Portfolios may invest in repurchase agreements,
lend their portfolio securities and may purchase securities on a when-issued
basis. The Equity Growth and Aggressive Equity Portfolios may invest in covered
call options and may also invest in stock options, stock futures contracts and
options on stock futures contracts, and may invest in forward foreign currency
exchange contracts to hedge currency risk associated with investment in non-U.S.
dollar-denominated securities. The Aggressive Equity Portfolio may invest in
convertible debentures and specialty equity-linked securities, such as PERCS,
ELKS or LYONs, of U.S., and to a limited extent, foreign issuers, which may
involve risks in addition to those associated with equity securities. The
Aggressive Equity Portfolio is a non-diversified portfolio under the Investment
Company Act of 1940, as amended (the "1940 Act") and therefore may invest a
greater proportion of its assets in the securities of a smaller number of
issuers and may, as a result, be subject to greater risk with respect to its
portfolio securities. See "Investment Limitations." See "Additional Investment
Information." Each of these investment strategies involves specific risks which
are described under "Investment Objectives and Policies" and "Additional
Investment Information" herein and under "Investment Objectives and Policies" in
the Statement of Additional Information.
12
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of each Portfolio is described below, together with
the policies the Fund employs in its efforts to achieve these objectives. Each
Portfolio's investment objective is a fundamental policy which may not be
changed without the approval of a majority of the Portfolio's outstanding voting
securities. There is no assurance that the Portfolios will attain their
objectives. The investment policies described below are not fundamental policies
and may be changed without shareholder approval.
THE EQUITY GROWTH PORTFOLIO
The Portfolio's investment objective is to provide long-term capital
appreciation by investing primarily in growth-oriented equity securities of
medium and large capitalization U.S. corporations and, to a limited extent, as
described below, foreign corporations. With respect to the Portfolio, equity
securities include common and preferred stocks, convertible securities, and
rights and warrants to purchase common stocks. Under normal circumstances, the
Portfolio will invest at least 65% of the value of its total assets in equity
securities.
The Adviser employs a flexible and eclectic investment process in pursuit of
the Portfolio's investment objectives. In selecting stocks for the Portfolio,
the Adviser concentrates on a universe of rapidly growing, high quality
companies and lower, but accelerating, earnings growth situations. The Adviser's
universe of potential investments generally comprises companies with market
capitalizations of $750 million or more. The Portfolio is not restricted to
investments in specific market sectors. The Adviser uses its research
capabilities, analytical resources and judgment to assess economic, industry and
market trends, as well as individual company developments, to select promising
growth investments for the Portfolio. The Adviser concentrates on companies with
strong, communicative managements and clearly defined strategies for growth. In
addition, the Adviser rigorously assesses company developments, including
changes in strategic direction, management focus and current and likely future
earnings results. Valuation is important to the Adviser but is viewed in the
context of prospects for sustainable earnings growth and the potential for
positive earnings surprises vis-a-vis consensus expectations. The Portfolio is
free to invest in any equity security that, in the Adviser's judgment, provides
above average potential for capital appreciation.
In selecting investments for the Portfolio, the Adviser emphasizes
individual security selection. The Portfolio's investments will generally be
diversified by number of issues but concentrated sector positions may result
from the investment process. The Portfolio has a long-term investment
perspective; however, the Adviser may take advantage of short-term opportunities
that are consistent with the Portfolio's objective by selling recently purchased
securities which have increased in value.
The Portfolio may invest up to 25% of its total assets at the time of
purchase in securities of foreign companies. The Portfolio may invest in
securities of foreign issuers directly or in the form of Depositary Receipts.
Investors should recognize that investing in foreign companies involves certain
special considerations which are not typically associated with investing in U.S.
companies. See "Additional Investment Information" herein and "Investment
Objectives and Policies -- Forward Foreign Currency Exchange Contracts" in the
Statement of Additional Information.
The Portfolio may invest in convertible securities of domestic and, subject
to the above restrictions, foreign issuers on occasions when, due to market
conditions, it is more advantageous to purchase such securities than to
13
<PAGE>
purchase common stock. Since the Portfolio invests in both common stocks and
convertible securities, the risks of investing in the general equity markets may
be tempered to a degree by the Portfolio's investments in convertible securities
which are often not as volatile as common stock.
Any remaining assets may be invested in certain securities or obligations,
including derivative securities, as set forth in "Additional Investment
Information" below.
THE EMERGING GROWTH PORTFOLIO
The Portfolio's investment objective is to provide long-term capital
appreciation by investing primarily in growth-oriented equity securities of
small- to medium-sized domestic corporations and, to a limited extent as
described below, foreign corporations. The production of any current income is
incidental to this objective. Such companies generally have annual gross
revenues ranging from $10 million to $750 million. With respect to the
Portfolio, equity securities include common and preferred stocks, convertible
securities, and rights and warrants to purchase common stocks, and any similar
equity interest, such as trust or partnership interests. Such equity securities
may not pay dividends or distributions and may or may not carry voting rights.
The Adviser employs a flexible investment program in pursuit of the
Portfolio's investment objective. The Portfolio is not restricted to investments
in specific market sectors. The Portfolio will invest in small- to medium-sized
companies that are early in their life cycle, but which have the potential, in
the Adviser's judgment, to become major enterprises. The Adviser uses its
judgment and research capabilities to assess economic, industry, market and
company developments to select investments in promising emerging growth
companies that are expected to benefit from new technology or new products or
services. In addition, the Adviser looks for special developments, such as
research discoveries, changes in customer demand, rejuvenated management or
basic changes in the economic environment. These situations are only
illustrative of the types of investments the Portfolio may make. The Portfolio
is free to invest in any common stock which in the Adviser's judgment provides
above-average potential for capital appreciation.
The Portfolio intends to manage its investments actively to accomplish its
investment objective. Since the Portfolio has a long-term investment
perspective, the Adviser does not intend to respond to short-term market
fluctuations or to acquire securities for the purpose of short-term trading;
however, the Adviser may take advantage of short-term opportunities that are
consistent with its objective.
The Portfolio may invest up to 25% of its total assets at the time of
purchase in securities of foreign companies. The Portfolio may invest in
securities of foreign issuers directly or in the form of Depositary Receipts.
See "Additional Investment Information" below. The Portfolio may enter into
forward foreign currency exchange contracts which provide for the purchase or
sale of foreign currencies in connection with the settlement of foreign
securities transactions or to hedge the underlying currency exposure related to
foreign investments. The Portfolio will not enter into these commitments for
speculative purposes. Investors should recognize that investing in foreign
companies involves certain special considerations which are not typically
associated with investing in U.S. companies. See "Additional Investment
Information" herein and "Investment Objectives and Policies -- Forward Currency
Exchange Contracts" in the Statement of Additional Information.
The Portfolio may also invest in convertible securities of domestic and,
subject to the above restrictions, foreign issuers on occasions when, due to
market conditions, it is more advantageous to purchase such securities than to
purchase common stock. The Portfolio will not invest in debt securities that are
not rated at least
14
<PAGE>
investment grade by either Standard & Poor's Ratings Group or Moody's Investors
Service, Inc. Since the Portfolio invests in both common stocks and convertible
securities, the risks of investing in the general equity markets may be tempered
to a degree by the Portfolio's investments in convertible securities, which are
often not as volatile as equity securities.
Any remaining assets may be invested in certain securities or obligations,
including derivative securities, that are set forth in "Additional Investment
Information" below.
THE MICROCAP PORTFOLIO
The Portfolio's investment objective is to provide long-term capital
appreciation by investing primarily in growth-oriented equity securities of
small domestic corporations and, to a limited extent as described below, foreign
corporations. The production of any current income is incidental to this
objective. Such companies generally have, at time of purchase, annual gross
revenues of $150 million or less or market capitalizations of $250 million or
less. With respect to the Portfolio, equity securities include common and
preferred stocks, convertible securities, rights and warrants to purchase common
stocks, and any similar equity interest, such as trust or partnership interests.
Such equity securities may or may not pay dividends or distributions and may or
may not carry voting rights.
The Adviser employs a flexible investment program in pursuit of the
Portfolio's investment objective. The Portfolio is not restricted to investments
in specific market sectors. The Portfolio will invest in equity securities,
including securities purchased in initial public offerings, of small companies
that are early in their life cycle, but which have the potential, in the
Adviser's judgement, to achieve long-term capital appreciation. The Adviser uses
its judgment and research capabilities to assess economic, industry, market and
company developments to select investments in promising companies that are
expected to benefit from new technology or new products or services. In
addition, the Adviser looks for special developments, such as research
discoveries, changes in customer demand, rejuvenated management or basic changes
in the economic environment. These situations are only illustrative of the types
of investments the Portfolio may make. The Portfolio is free to invest in any
equity security which in the Adviser's judgment provides above-average potential
for capital appreciation.
The Portfolio intends to manage its investments actively to accomplish its
investment objective. Since the Portfolio has a long-term investment
perspective, the Adviser does not intend to respond to short-term market
fluctuations or to acquire securities for the purpose of short-term trading;
however, the Adviser may take advantage of short-term opportunities that are
consistent with its objective.
The Portfolio may invest up to 25% of its total assets at the time of
purchase in securities of foreign companies. The Portfolio may invest in such
securities of foreign issuers directly or in the form of Depositary Receipts.
See "Additional Investment Information" below. The Portfolio may enter into
forward foreign currency exchange contracts which provide for the purchase or
sale of foreign currencies in connection with the settlement of foreign
securities transactions or to hedge the underlying currency exposure related to
foreign investments. The Portfolio will not enter into these commitments for
speculative purposes. Investors should recognize that investing in foreign
companies involves certain special considerations which are not typically
associated with investing in U.S. companies. See "Additional Investment
Information" herein and "Investment Objectives and Policies -- Forward Currency
Exchange Contracts" in the Statement of Additional Information.
15
<PAGE>
The Portfolio may invest in convertible securities of domestic and, subject
to the above restrictions, foreign issuers on occasions when, due to market
conditions, it is more advantageous to purchase such securities than to purchase
common stock. The Portfolio will not invest in debt securities that are not
rated at least investment grade by either Standard & Poor's Ratings Group or
Moody's Investors Service, Inc. Since the Portfolio invests in both common
stocks and convertible securities, the risks of investing in the general equity
markets may be tempered to a degree by the Portfolio's investments in
convertible securities, which are often not as volatile as equity securities.
See "Additional Investment Information".
Any remaining assets may be invested in certain securities or obligations,
including derivative securities, as set forth in "Additional Investment
Information" below.
THE AGGRESSIVE EQUITY PORTFOLIO
The Portfolio's investment objective is to provide capital appreciation by
investing primarily in a non-diversified portfolio of corporate equity and
equity-linked securities. With respect to the Portfolio, equity and
equity-linked securities include common and preferred stocks, convertible
securities, rights and warrants to purchase common stocks, options, futures, and
specialty securities, such as ELKS, LYONs, PERCS of U.S., and to a limited
extent, as described below, foreign issuers. The Aggressive Equity Fund is a
non-diversified portfolio and thus can be more heavily weighted in fewer stocks
than the Equity Growth Portfolio, which is a diversified portfolio. See
"Investment Limitations." Under normal circumstances, the Portfolio will invest
at least 65% of the value of its total assets in equity and equity-linked
securities.
The Adviser employs a flexible and eclectic investment process in pursuit of
the Portfolio's investment objective. In selecting securities for the Portfolio,
the Adviser concentrates on a universe of rapidly growing, high quality
companies and lower, but accelerating, earnings growth situations. The Adviser's
universe of potential investments generally comprises companies with market
capitalizations of $500 million or more but smaller market capitalization
securities may be purchased from time to time. The Portfolio is not restricted
to investments in specific market sectors. The Adviser uses its research
capabilities, analytical resources and judgment to assess economic, industry and
market trends, as well as individual company developments, to select promising
investments for the Portfolio. The Adviser concentrates on companies with
strong, communicative managements and clearly defined strategies for growth. In
addition, the Adviser rigorously assesses earnings results. The Adviser seeks
companies which will deliver surprisingly strong earnings growth. Valuation is
of secondary importance to the Adviser and is viewed in the context of prospects
for sustainable earnings growth and the potential for positive earnings
surprises in relation to consensus expectations. The Portfolio is free to invest
in any equity or equity-linked security that, in the Adviser's judgment,
provides above average potential for capital appreciation.
The Portfolio may from time to time and consistent with applicable legal
requirements sell securities short that it owns (i.e., "against the box") or
borrows. See "Additional Investment Information".
In selecting investments for the Portfolio, the Adviser emphasizes
individual security selection. Overweighted sector positions and issuer
positions may result from the investment process. See "Investment Limitations."
The Portfolio has a long-term investment perspective; however, the Adviser may
take advantage of short-term opportunities that are consistent with the
Portfolio's objective by selling recently purchased securities which have
increased in value.
16
<PAGE>
The Portfolio may invest in equity and equity-linked securities of domestic
and foreign corporations. However, the Portfolio does not expect to invest more
than 25% of its total assets at the time of purchase in securities of foreign
companies. The Portfolio may invest in securities of foreign issuers directly or
in the form of American Depositary Receipts ("ADRs"). Investors should recognize
that investing in foreign companies involves certain special considerations
which are not typically associated with investing in U.S. companies. See
"Additional Investment Information" herein and "Investment Objectives and
Policies -- Forward Foreign Currency Exchange Contracts" in the Statement of
Additional Information.
Any remaining assets may be invested in certain securities or obligations,
including derivative securities, as set forth in "Additional Investment
Information" below.
ADDITIONAL INVESTMENT INFORMATION
CONVERTIBLE SECURITIES, WARRANTS AND EQUITY-LINKED SECURITIES
The Portfolios may invest in securities such as convertible securities,
preferred stock, warrants or other securities exchangeable under certain
circumstances for shares of common stock. Warrants are instruments giving
holders the right, but not the obligation, to buy shares of a company at a given
price during a specified period.
The Aggressive Equity Portfolio may invest in equity-linked securities,
including, among others, PERCS, ELKS or LYONs, which are securities that are
convertible into or the value of which is based upon the value of, equity
securities upon certain terms and conditions. The amount received by an investor
at maturity of such securities is not fixed but is based on the price of the
underlying common stock. It is impossible to predict whether the price of the
underlying common stock will rise or fall. Trading prices of the underlying
common stock will be influenced by the issuer's operational results, by complex,
interrelated political, economic, financial, or other factors affecting the
capital markets, the stock exchanges on which the underlying common stock is
traded and the market segment of which the issuer is a part. In addition, it is
not possible to predict how equity-linked securities will trade in the secondary
market, which is fairly developed and liquid. The market for such securities may
be shallow, however, and high volume trades may be possible only with
discounting. In addition to the foregoing risks, the return on such securities
depends on the creditworthiness of the issuer of the securities, which may be
the issuer of the underlying securities or a third party investment banker or
other lender. The creditworthiness of such third party issuer of equity-linked
securities may, and often does, exceed the creditworthiness of the issuer of the
underlying securities. The advantage of using equity-linked securities over
traditional equity and debt securities is that the former are income producing
vehicles that may provide a higher income than the dividend income on the
underlying equity securities while allowing some participation in the capital
appreciation of the underlying equity securities. Another advantage of using
equity-linked securities is that they may be used for hedging to reduce the risk
of investing in the generally more volatile underlying equity securities.
The following are three examples of equity-linked securities. The Portfolio
may invest in the securities described below or other similar equity-linked
securities.
PERCS. Preferred Equity Redemption Cumulative Stock ("PERCS") technically
are preferred stock with some characteristics of common stock. PERCS are
mandatorily convertible into common stock after a period of time, usually three
years, during which the investors' capital gains are capped, usually at 30%.
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<PAGE>
Commonly, PERCS may be redeemed by the issuer at any time or if the issuer's
common stock is trading at a specified price level or better. The redemption
price starts at the beginning of the PERCS duration period at a price that is
above the cap by the amount of the extra dividends the PERCS holder is entitled
to receive relative to the common stock over the duration of the PERCS and
declines to the cap price shortly before maturity of the PERCS. In exchange for
having the cap on capital gains and giving the issuer the option to redeem the
PERCS at any time or at the specified common stock price level, the Portfolio
may be compensated with a substantially higher dividend yield than that on the
underlying common stock. Investors, such as the Portfolio, that seek current
income, find PERCS attractive because a PERCS provides a higher dividend income
than that paid with respect to a company's common stock.
ELKS. Equity-Linked Securities ("ELKS") differ from ordinary debt
securities, in that the principal amount received at maturity is not fixed but
is based on the price of the issuer's common stock. ELKS are debt securities
commonly issued in fully registered form for a term of three years under an
indenture trust. At maturity, the holder of ELKS will be entitled to receive a
principal amount equal to the lesser of a cap amount, commonly in the range of
30% to 55% greater than the current price of the issuer's common stock, or the
average closing price per share of the issuer's common stock, subject to
adjustment as a result of certain dilution events, for the 10 trading days
immediately prior to maturity. Unlike PERCS, ELKS are commonly not subject to
redemption prior to maturity. ELKS usually bear interest during the three-year
term at a substantially higher rate than the dividend yield on the underlying
common stock. In exchange for having the cap on the return that might have been
received as capital gains on the underlying common stock, the Portfolio may be
compensated with the higher yield, contingent on how well the underlying common
stock does. Investors, such as the Portfolio, that seek current income, find
ELKS attractive because ELKS provide a higher dividend income than that paid
with respect to a company's common stock.
LYONS. Liquid Yield Option Notes ("LYONs") differ from ordinary debt
securities, in that the amount received prior to maturity is not fixed but is
based on the price of the issuer's common stock. LYONs are zero-coupon notes
that sell at a large discount from face value. For an investment in LYONs, the
Portfolio will not receive any interest payments until the notes mature,
typically in 15 to 20 years, when the notes are redeemed at face, or par, value.
The yield on LYONs, typically, is lower-than-market rate for debt securities of
the same maturity, due in part to the fact that the LYONs are convertible into
common stock of the issuer at any time at the option of the holder of the LYONs.
Commonly, the LYONs are redeemable by the issuer at any time after an initial
period or if the issuer's common stock is trading at a specified price level or
better, or, at the option of the holder, upon certain fixed dates. The
redemption price typically is the purchase price of the LYONs plus accrued
original issue discount to the date of redemption, which amounts to the
lower-than-market yield. The Portfolio will receive only the lower-than-market
yield unless the underlying common stock increases in value at a substantial
rate. LYONs are attractive to investors, like the Portfolio, when it appears
that they will increase in value due to the rise in value of the underlying
common stock.
DEPOSITARY RECEIPTS. The Portfolios may invest indirectly in securities of
foreign companies through sponsored or unsponsored American Depositary Receipts
("ADRs"), Global Depositary Receipts ("GDRs") and other types of Depositary
Receipts (which, together with ADRs and GDRs, are hereinafter collectively
referred to as "Depositary Receipts"), to the extent such Depositary Receipts
are or become available. Depositary Receipts are not necessarily denominated in
the same currency as the underlying securities. In addition, the issuers of the
securities underlying unsponsored Depositary Receipts are not obligated to
disclose material
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<PAGE>
information in the U.S. and, therefore, there may be less information available
regarding such issuers and there may not be a correlation between such
information and the market value of the Depositary Receipts. ADRs are Depositary
Receipts typically issued by a U.S. financial institution which evidence
ownership interests in a security or pool of securities issued by a foreign
issuer. GDRs and other types of Depositary Receipts are typically issued by
foreign banks or trust companies, although they also may be issued by U.S.
financial institutions, and evidence ownership interests in a security or pool
of securities issued by either a foreign or a U.S. corporation. Generally,
Depositary Receipts in registered form are designed for use in the U.S.
securities market and Depositary Receipts in bearer form are designed for use in
securities markets outside the U.S. For purposes of a Portfolio's investment
policies, the Portfolio's investments in Depositary Receipts will be deemed to
be investments in the underlying securities.
FOREIGN INVESTMENT. The Portfolios may invest in U.S. dollar-denominated
securities of foreign issuers trading in U.S. markets and the Emerging Growth
and Aggressive Equity Portfolios may invest in non-U.S. dollar-denominated
securities of foreign issuers. Investment in securities of foreign issuers and
in foreign branches of domestic banks involves somewhat different investment
risks than those affecting securities of U.S. domestic issuers. There may be
limited publicly available information with respect to foreign issuers, and
foreign issuers are not generally subject to uniform accounting, auditing and
financial standards and requirements comparable to those applicable to U.S.
companies. There may also be less government supervision and regulation of
foreign securities exchanges, brokers and listed companies than in the U.S. Many
foreign securities markets have substantially less volume than U.S. national
securities exchanges, and securities of some foreign issuers are less liquid and
more volatile than securities of comparable domestic issuers. Brokerage
commissions and other transaction costs on foreign securities exchanges are
generally higher than in the U.S. Dividends and interest paid by foreign issuers
may be subject to withholding and other foreign taxes, which may decrease the
net return on foreign investments as compared to dividends and interest paid to
the Portfolio by domestic companies. It is not expected that a Portfolio or its
shareholders would be able to claim a credit for U.S. tax purposes with respect
to any such foreign taxes. See "Taxes." Additional risks include future
political and economic developments, the possibility that a foreign jurisdiction
might impose or change withholding taxes on income payable with respect to
foreign securities, possible seizure, nationalization or expropriation of the
foreign issuer or foreign deposits and the possible adoption of foreign
governmental restrictions such as exchange controls.
Investments in securities of foreign issuers are frequently denominated in
foreign currencies and, since the Emerging Growth and Aggressive Equity
Portfolios may also temporarily hold uninvested reserves in bank deposits in
foreign currencies, the value of the Portfolios' assets measured in U.S. dollars
may be affected favorably or unfavorably by changes in currency exchange rates
and in exchange control regulations, and the Portfolios may incur costs in
connection with conversions between various currencies.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The Emerging Growth and
Aggressive Equity Portfolios may enter into forward foreign currency exchange
contracts ("forward contracts"), that provide for the purchase or sale of an
amount of a specified foreign currency at a future date. Purposes for which such
contracts may be used include protecting against a decline in a foreign currency
against the U.S. dollar between the trade date and settlement date when the
Portfolio purchases or sells non-U.S. dollar denominated securities, locking in
19
<PAGE>
the U.S. dollar value of dividends declared on securities held by the Portfolio
and generally protecting the U.S. dollar value of securities held by the
Portfolio against exchange rate fluctuation. Such contracts may also be used as
a protective measure against the effects of fluctuating rates of currency
exchange and exchange control regulations. While such forward contracts may
limit losses to the Portfolio against exchange rate fluctuations, they will also
limit any gains that may otherwise have been realized. Such forward contracts
are derivative securities, in which the Portfolio may invest for hedging
purposes. See "Investment Objectives and Policies -- Forward Currency Exchange
Contracts" in the Statement of Additional Information.
LOANS OF PORTFOLIO SECURITIES. The Portfolios may lend their securities to
brokers, dealers, domestic and foreign banks or other financial institutions for
the purpose of increasing its net investment income. These loans must be secured
continuously by cash or equivalent collateral, or by a letter of credit at least
equal to the market value of the securities loaned plus accrued interest or
income. There may be a risk of delay in recovery of the securities or even loss
of rights in the collateral should the borrower of the securities fail
financially. A Portfolio will not enter into securities loan transactions
exceeding, in the aggregate, 33 1/3% of the market value of its total assets.
For more detailed information about securities lending, see "Investment
Objectives and Policies" in the Statement of Additional Information.
MONEY MARKET INSTRUMENTS. Each Portfolio is permitted to invest in money
market instruments, although the Portfolios intend to stay invested in
securities satisfying their primary investment objective to the extent
practical. Each Portfolio may make money market investments pending other
investment or settlement for liquidity, or in adverse market conditions. The
money market investments permitted for the Portfolios include obligations of the
United States Government and its agencies and instrumentalities; other debt
securities; commercial paper including bank obligations; certificates of deposit
(including Eurodollar certificates of deposit); and repurchase agreements. For
more detailed information about these money market investments, see "Description
of Securities and Ratings" in the Statement of Additional Information.
NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED
SECURITIES. The Equity Growth and Aggressive Equity Portfolios may invest in
securities that are neither listed on a stock exchange nor traded over the
counter. Such unlisted equity securities may involve a higher degree of business
and financial risk that can result in substantial losses. As a result of the
absence of a public trading market for these securities, they may be less liquid
than publicly traded securities. Although these securities may be resold in
privately negotiated transactions, the prices realized from these sales could be
less than those originally paid by such Portfolios or less than what may be
considered the fair value of such securities. Further, companies whose
securities are not publicly traded may not be subject to the disclosure and
other investor protection requirements which might be applicable if their
securities were publicly traded. If such securities are required to be
registered under the securities laws of one or more jurisdictions before being
resold, the Portfolio may be required to bear the expenses of registration. As a
general matter, the Portfolio may not invest more than 15% of its net assets in
illiquid securities, including securities for which there is no readily
available secondary market. Securities that are not registered under the
Securities Act of 1933, as amended, but that can be offered and sold to
qualified institutional buyers under Rule 144A under that Act will not be
included within the foregoing 15% restriction if the securities are determined
to be liquid. The Board of Directors has adopted guidelines and delegated to the
Adviser, subject to the supervision of the Board of Directors, the daily
function of determining and monitoring the liquidity of Rule 144A securities.
Rule 144A securities may become illiquid if qualified institutional buyers are
not interested in acquiring the securities.
20
<PAGE>
REPURCHASE AGREEMENTS. The Portfolios may enter into repurchase agreements
with brokers, dealers or banks that meet the credit guidelines established by
the Fund's Board of Directors. In a repurchase agreement, the Portfolio buys a
security from a seller that has agreed to repurchase it at a mutually agreed
upon date and price, reflecting the interest rate effective for the term of the
agreement. The term of these agreements is usually from overnight to one week,
and never exceeds one year. Repurchase agreements may be viewed as a fully
collateralized loan of money by the Portfolio to the seller. The Portfolio
always receives securities, with a market value at least equal to the purchase
price (including accrued interest) as collateral and this value is maintained
during the term of the agreement. If the seller defaults and the collateral
value declines, the Portfolio might incur a loss. If bankruptcy proceedings are
commenced with respect to the seller, the Portfolio's realization upon the
collateral may be delayed or limited. The aggregate of certain repurchase
agreements and certain other investments is limited as set forth under
"Investment Limitations."
SHORT SALES. The Aggressive Equity Portfolio may from time to time sell
securities short consistent with applicable legal requirements. A short sale is
a transaction in which the Portfolio would sell securities it either owns or has
the right to acquire at no added cost (i.e., "against the box") or does not own
(but has borrowed) in anticipation of a decline in the market price of the
securities. When the Portfolio makes a short sale of borrowed securities, the
proceeds it receives from the sale will be held on behalf of a broker until the
Portfolio replaces the borrowed securities. To deliver the securities to the
buyer, the Portfolio will need to arrange through a broker to borrow the
securities and, in so doing, the Portfolio will become obligated to replace the
securities borrowed at their market price at the time of the replacement,
whatever that price may be. The Portfolio may have to pay a premium to borrow
the securities and must pay any dividends or interest payable on the securities
until they are replaced.
The Portfolio's obligation to replace the securities borrowed in connection
with a short sale will be secured by collateral deposited with the broker that
consists of cash, U.S. Government securities or other liquid, high grade debt
obligations. In addition, if the short sale is not "against the box", the
Portfolio will place in a segregated account with the Custodian an amount of
cash, U.S. Government securities or other liquid, high grade debt obligations
equal to the difference, if any, between (1) the market value of the securities
sold at the time they were sold short and (2) any cash, U.S. Government
securities or other liquid, high grade debt obligations deposited as collateral
with the broker in connection with the short sale (not including the proceeds of
the short sale). Short sales by the Portfolio involve certain risks and special
considerations. Possible losses from short sales differ from losses that could
be incurred from a purchase of a security, because losses from short sales may
be unlimited, whereas losses from purchases can equal only the total amount
invested.
SMALL AND MEDIUM-SIZED COMPANIES. Because the Emerging Growth and MicroCap
Portfolios seek long-term capital appreciation by investing primarily in small-
to medium-sized companies and small companies, respectively, both of which types
of companies are more vulnerable to financial and other risks than larger, more
established companies, investments in these Portfolios may involve a higher
degree of risk and price volatility than the general equity markets. The
Aggressive Equity Portfolio may invest in small- to medium-sized companies to a
lesser extent.
STOCK OPTIONS, FUTURES CONTRACTS AND OPTIONS IN FUTURES CONTRACTS. The
Equity Growth and Aggressive Equity Portfolios may write (i.e., sell) covered
call options on portfolio securities. The Equity Growth and Aggressive Equity
Portfolios may write covered put options on portfolio securities. By selling a
covered call option, the Portfolio would become obligated during the term of the
option to deliver the securities underlying
21
<PAGE>
the option should the option holder choose to exercise the option before the
option's termination date. In return for the call it has written, the Portfolio
will receive from the purchaser (or option holder) a premium which is the price
of the option, less a commission charged by a broker. The Portfolio will keep
the premium regardless of whether the option is exercised. By selling a covered
put option, the Portfolio incurs an obligation to buy the security underlying
the option from the purchaser of the put at the option's exercise price at any
time during the option period, at the purchaser's election (certain options
written by the Portfolio will be exercisable by the purchaser only on a specific
date). A call option is "covered" if the Portfolio owns the security underlying
the option it has written or has an absolute or immediate right to acquire the
security by holding a call option on such security, or maintains a sufficient
amount of cash, cash equivalents or liquid securities to purchase the underlying
security.
Generally, a put option is "covered" if the Fund maintains cash, U.S.
Government securities or other high grade debt obligations equal to the exercise
price of the option, or if the Fund holds a put option on the same underlying
security with a similar or higher exercise price.
When the Portfolio writes covered call options, it augments its income by
the premiums received and is thereby hedged to the extent of that amount against
a decline in the price of the underlying securities. The premiums received will
offset a portion of the potential loss incurred by the Portfolio if the
securities underlying the options are ultimately sold by the Portfolio at a
loss. However, during the option period, the Portfolio has, in return for the
premium on the option, given up the opportunity for capital appreciation above
the exercise price should the market price of the underlying security increase,
but has retained the risk of loss should the price of the underlying security
decline.
The Equity Growth and the Aggressive Equity Portfolios may write put options
to receive the premiums paid by purchasers (when the Adviser wishes to purchase
the security underlying the option at a price lower than its current market
price, in which case the Portfolio will write the covered put at an exercise
price reflecting the lower purchase price sought) and to close out a long put
option position.
The Equity Growth and the Aggressive Equity Portfolios may also purchase put
options on their portfolio securities or call options. When the Portfolio
purchases a call option it acquires the right to buy a designated security at a
designated price (the "exercise price"), and when the Portfolio purchases a put
option it acquires the right to sell a designated security at the exercise
price, in each case on or before a specified date (the "termination date"),
which is usually not more than nine months from the date the option is issued.
The Portfolio may purchase call options to close out a covered call position or
to protect against an increase in the price of a security it anticipates
purchasing. The Portfolio may purchase put options on securities which it holds
in its portfolio to protect itself against decline in the value of the security.
If the value of the underlying security were to fall below the exercise price of
the put purchased in an amount greater than the premium paid for the option, the
Portfolio would incur no additional loss. The Portfolio may also purchase put
options to close out written put positions in a manner similar to call option
closing purchase transactions. There are no other limits on the Portfolio's
ability to purchase call and put options.
The Equity Growth and the Aggressive Equity Portfolios may enter into
futures contracts and options on futures contracts to remain fully invested and
to reduce transaction costs. The Portfolio may also enter into futures
transactions as a hedge against fluctuations in the price of a security it holds
or intends to acquire, but not for speculation or for achieving leverage. The
Portfolio may enter into futures contracts and options on futures
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contracts provided that not more than 5% of the Portfolio's total assets at the
time of entering into the contract or option is required as deposit to secure
obligations under such contracts and options, and provided that not more than
20% of the Portfolio's total assets in the aggregate is invested in futures
contracts and options on futures contracts (and in options in the case of the
Equity Growth and the Aggressive Equity Portfolios).
The Equity Growth and the Aggressive Equity Portfolios may purchase and
write call and put options on futures contracts that are traded on any
international exchange, traded over-the-counter or which are synthetic options
or futures or equity swaps, and may enter into closing transactions with respect
to such options to terminate an existing position. An option on a futures
contract gives the purchaser the right (in return for the premium paid) to
assume a position in a futures contract (a long position if the option is a call
and a short position if the option is a put) at a specified exercise price at
any time during the term of the option. The Portfolio will purchase and write
options on futures contracts for identical purposes to those set forth above for
the purchase of a futures contract (purchase of a call option or sale of a put
option) and the sale of a futures contract (purchase of a put option or sale of
a call option), or to close out a long or short position in future contracts.
Options, futures and options on futures are derivative securities, in which
the Portfolio may invest for hedging purposes, as well as to remain fully
invested and to reduce transaction costs. Investing for the latter two purposes
may be considered speculative. The primary risks associated with the use of
options, futures and options on futures are (i) imperfect correlation between
the change in market value of the stocks held by the Portfolio and the prices of
futures and options relating to the stocks purchased or sold by the Portfolio;
and (ii) possible lack of a liquid secondary market for an option or a futures
contract and the resulting inability to close a futures position which could
have an adverse impact on the Portfolio's ability to hedge. In the opinion of
the Board of Directors, the risk that the Portfolio will be unable to close out
a futures position or options contract will be minimized by only entering into
futures contracts or options transactions for which there appears to be a liquid
secondary market.
TEMPORARY INVESTMENTS. During periods in which the Adviser believes changes
in economic, financial or political conditions make it advisable, the Portfolios
may reduce their holdings in equity and other securities for temporary defensive
purposes and the Portfolios may invest in certain short-term (less than twelve
months to maturity) and medium-term (not greater than five years to maturity)
debt securities or may hold cash. The short-term and medium-term debt securities
in which the Portfolio may invest consist of (a) obligations of the United
States or foreign country governments, their respective agencies or
instrumentalities; (b) bank deposits and bank obligations (including
certificates of deposit, time deposits and bankers' acceptances) of United
States or foreign country banks denominated in any currency; (c) floating rate
securities and other instruments denominated in any currency issued by
international development agencies; (d) finance company and corporate commercial
paper and other short-term corporate debt obligations of United States and
foreign country corporations meeting the Portfolio's credit quality standards;
and (e) repurchase agreements with banks and broker-dealers with respect to such
securities. For temporary defensive purposes, the Portfolios intend to invest
only in short-term and medium-term debt securities that the Adviser believes to
be of high quality, i.e., subject to relatively low risk of loss of interest or
principal (there is currently no rating system for debt securities to most
foreign countries).
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Portfolios may purchase
securities on a when-issued or delayed delivery basis. In such transactions,
instruments are bought with payment and delivery taking place in the future in
order to secure what is considered to be an advantageous yield or price at the
time of the
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transaction. Delivery of and payment for these securities may take as long as a
month or more after the date of the purchase commitment, but will take place no
more than 120 days after the trade date. The Portfolio will maintain with the
Custodian a separate account with a segregated portfolio of high-grade debt
securities or cash in an amount at least equal to these commitments. The payment
obligation and the interest rates that will be received are each fixed at the
time a Portfolio enters into the commitment and no interest accrues to the
Portfolio until settlement. Thus, it is possible that the market value at the
time of settlement could be higher or lower than the purchase price if the
general level of interest rates has changed. It is a current policy of the
Portfolios not to enter into when-issued commitments exceeding, in the
aggregate, 15% of the Portfolio's net assets other than the obligations created
by these commitments.
INVESTMENT LIMITATIONS
Except for the MicroCap and Aggressive Equity Portfolios, each Portfolio is
a diversified investment company and is therefore subject to the following
fundamental limitations: (a) as to 75% of its total assets, a Portfolio may not
invest more than 5% of its total assets in the securities of any one issuer,
except obligations of the U.S. Government and its agencies and
instrumentalities, and (b) a Portfolio may not own more than 10% of the
outstanding voting securities of any one issuer.
The MicroCap and Aggressive Equity Portfolios are non-diversified portfolios
under the 1940 Act, which means that the Portfolios are not limited by the 1940
Act in the proportion of their assets that may be invested in the obligations of
a single issuer. Thus, the Portfolios may invest a greater proportion of their
assets in the securities of a small number of issuers and as a result will be
subject to greater risk with respect to their portfolio securities. However, the
Portfolios intend to comply with diversification requirements imposed by the
Internal Revenue Code of 1986, as amended (the "Code"), for qualification as
regulated investment companies. See "Investment Limitations" in the Statement of
Additional Information.
Each Portfolio also operates under certain investment restrictions that are
deemed fundamental limitations and may be changed only with the approval of the
holders of a majority of such Portfolio's outstanding shares. See "Investment
Limitations" in the Statement of Additional Information. In addition, each
Portfolio operates under certain non-fundamental investment limitations as
described below and in the Statement of Additional Information. Each Portfolio
may not: (i) enter into repurchase agreements with more than seven days to
maturity if, as a result, more than 15% of the market value of the Portfolio's
net assets would be invested in such repurchase agreements and other investments
for which market quotations are not readily available or which are otherwise
illiquid; (ii) borrow money, except from banks for extraordinary or emergency
purposes, and then only in amounts up to 10% of the value of the Portfolio's
total assets, taken at cost at the time of borrowing; or purchase securities
while borrowings exceed 5% of its total assets; (iii) mortgage, pledge or
hypothecate any assets except in connection with any such borrowing in amounts
up to 10% of the value of the Portfolio's net assets at the time of borrowing;
(iv) invest in fixed time deposits with a duration of over seven calendar days;
or (v) invest in fixed time deposits with a duration of from two business days
to seven calendar days if more than 10% of the Portfolio's total assets would be
invested in these deposits.
MANAGEMENT OF THE FUND
INVESTMENT ADVISER. Morgan Stanley Asset Management Inc. is the Investment
Adviser and Administrator of the Fund and each of its portfolios. The Adviser
provides investment advice and portfolio management
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<PAGE>
services pursuant to an Investment Advisory Agreement and, subject to the
supervision of the Fund's Board of Directors, makes each of the Portfolio's
day-to-day investment decisions, arranges for the execution of portfolio
transactions and generally manages each of the Portfolio's investments. The
Adviser is entitled to receive from each Portfolio an annual management fee,
payable quarterly, equal to the percentage of average daily net assets set forth
in the table below. However, the Adviser has agreed to a reduction in the fees
payable to it and to reimburse the Portfolios, if necessary, if such fees would
cause the total annual operating expenses of either Portfolio to exceed the
respective percentage of average daily net assets set forth below.
<TABLE>
<CAPTION>
MAXIMUM TOTAL OPERATING
EXPENSES AFTER FEE
WAIVER
------------------------
PORTFOLIO MANAGEMENT FEE CLASS A CLASS B
- --------------------------------------------- ----------------- ----------- -----------
<S> <C> <C> <C>
Equity Growth Portfolio 0.60% 0.80% 1.05%
Emerging Growth Portfolio 1.00% 1.25% 1.50%
MicroCap Portfolio 1.25% 1.50% 1.75%
Aggressive Equity Portfolio 0.80% 1.00% 1.25%
</TABLE>
The fees payable by the Emerging Growth, MicroCap and Aggressive Equity
Portfolios are higher than the management fees paid by most investment
companies, but the Adviser believes the fees are comparable to those of
investment companies with similar investment objectives.
The Adviser, with principal offices at 1221 Avenue of the Americas, New
York, New York 10020, conducts a worldwide portfolio management business,
providing a broad range of portfolio management services to customers in the
United States and abroad. At December 31, 1995, the Adviser, together with its
affiliated asset management companies, managed investments totaling
approximately $57.4 billion, including approximately $41.9 billion under active
management and $15.5 billion as Named Fiduciary or Fiduciary Adviser. See
"Management of the Fund" in the Statement of Additional Information.
PORTFOLIO MANAGERS. The following persons have primary responsibility for
managing the Portfolios indicated.
EQUITY GROWTH PORTFOLIO -- KURT FEUERMAN AND MARGARET K. JOHNSON. Kurt
Feuerman joined Morgan Stanley Asset Management in July 1993 as a Managing
Director in the Institutional Equity Group. Previously Mr. Feuerman was a
Managing Director of Morgan Stanley & Co., Incorporated's Research Department,
where he was responsible for emerging growth stocks, gaming and restaurants.
Before joining Morgan Stanley, Mr. Feuerman was a Managing Director of Drexel
Burnham Lambert, where he had been an equity analyst since 1984. Over the years,
he has been highly ranked in the Institutional Investor All American Research
Poll in four separate categories: packaged food, tobacco, emerging growth and
gaming. Mr. Feuerman earned an M.B.A. from Columbia University in 1982, an M.A.
from Syracuse University in 1980, and a B.A. from McGill University in 1977.
Margaret Johnson is a Principal of the Adviser and a Portfolio Manager in the
Institutional Equity Group. She joined the Adviser in 1984 and worked as an
Analyst in the Marketing and Fiduciary Advisor areas. Ms. Johnson became an
Equity Analyst in 1986 and a Portfolio Manager in 1989. Prior to joining Morgan
Stanley, she worked for the New York City PBS affiliate, WNET, Channel 13. She
holds a B.A. degree from Yale College and is a Chartered Financial Analyst. Mr.
Feuerman and Ms. Johnson have had primary responsibility for managing the
Portfolio's assets since July 1993 and April 1991, respectively.
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EMERGING GROWTH PORTFOLIO -- DENNIS G. SHERVA. Dennis Sherva is a Managing
Director of Morgan Stanley & Co., Incorporated and head of emerging growth stock
investments at the Adviser. He has had primary responsibility for managing the
Portfolio's assets since November 1989. Prior to joining the Adviser in 1988,
Mr. Sherva was Morgan Stanley's Director of Worldwide Research activities for
five years and maintained direct responsibility for emerging growth stock
strategy and analysis. As an analyst following emerging growth stocks for the
past decade, he was rated number one in the small growth company category six
times by Institutional Investor magazine's All-America Research Team poll.
Before joining Morgan Stanley in 1977, Mr. Sherva had twelve years of industrial
and investment experience. He serves on the Board of Directors of Morgan Stanley
Venture Capital Inc. and Morgan Stanley R&D Ventures, Inc. Mr. Sherva graduated
from the University of Minnesota and received an M.A. from Wayne State
University. He is also a Chartered Financial Analyst.
MICROCAP PORTFOLIO -- DENNIS G. SHERVA. Information about Mr. Sherva is
included under the Emerging Growth Portfolio above.
AGGRESSIVE EQUITY PORTFOLIO -- KURT FEUERMAN. Information about Mr.
Feuerman is included under the Equity Growth Portfolio above.
ADMINISTRATOR. The Adviser also provides the Fund with administrative
services pursuant to an Administration Agreement. The services provided under
the Administration Agreement are subject to the supervision of the Officers and
the Board of Directors of the Fund and include day-to-day administration of
matters related to the corporate existence of the Fund, maintenance of its
records, preparation of reports, supervision of the Fund's arrangements with its
custodian, and assistance in the preparation of the Fund's registration
statements under Federal and State laws. The Administration Agreement also
provides that the Administrator, through its agents, will provide to the Fund
dividend disbursing and transfer agent services. For its services under the
Administration Agreement, the Fund pays the Adviser a monthly fee which on an
annual basis equals 0.15% of the average daily net assets of the Portfolio.
Under an agreement between the Adviser and The Chase Manhattan Bank, N.A.
("Chase"), Chase provides certain administrative services to the Fund. In a
merger completed on September 1, 1995, Chase succeeded to all of the rights and
obligations under the U.S. Trust Administration Agreement between the Adviser
and the United States Trust Company of New York ("U.S. Trust"), pursuant to
which U.S. Trust had agreed to provide certain administrative services to the
Fund. Pursuant to a delegation clause in the U.S. Trust Administration
Agreement, U.S. Trust delegated its administration responsibilities to Chase
Global Funds Services Company ("CGFSC"), formerly known as Mutual Funds Service
Company, which after the merger with Chase is a subsidiary of Chase and will
continue to provide certain administrative services to the Fund. The Adviser
supervises and monitors such administrative services provided by CGFSC. The
services provided under the Administration Agreement and the U.S. Trust
Administration Agreement are also subject to the supervision of the Board of
Directors of the Fund. The Board of Directors of the Fund has approved the
provision of services described above pursuant to the Administration Agreement
and the U.S. Trust Administration Agreement as being in the best interests of
the Fund. CGFSC's business address is 73 Tremont Street, Boston, Massachusetts
02108-3913. For additional information regarding the Administration Agreement or
the U.S. Trust Administration Agreement, see "Management of the Fund" in the
Statement of Additional Information.
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DIRECTORS AND OFFICERS. Pursuant to the Fund's Articles of Incorporation,
the Board of Directors decides upon matters of general policy and reviews the
actions of the Fund's Adviser, Administrator and Distributor. The Officers of
the Fund conduct and supervise its daily business operations.
DISTRIBUTOR. Morgan Stanley serves as the exclusive Distributor of the
shares of the Fund. Under its Distribution Agreement with the Fund, Morgan
Stanley sells shares of each Portfolio upon the terms and at the current
offering price described in this Prospectus. Morgan Stanley is not obligated to
sell any certain number of shares of any Portfolio.
The Portfolios currently offer only the classes of shares offered by this
Prospectus. The Portfolios may in the future offer one or more classes of shares
with features, distribution expenses or other expenses that are different from
those of the classes currently offered. The Fund has adopted a Plan of
Distribution with respect to the Class B shares pursuant to Rule 12b-1 under the
1940 Act (the "Plan"). Under the Plan, the Distributor is entitled to receive
from the Portfolios a distribution fee, which is accrued daily and paid
quarterly, of 0.25% of the Class B shares' average daily net assets on an
annualized basis. The Distributor expects to reallocate most of its fee to its
investment representatives. The Distributor may, in its discretion, voluntarily
waive from time to time all or any portion of its distribution fee and each of
the Distributor and the Adviser if free to make additional payments out of its
own assets to promote the sale of Fund shares, including payments that
compensate financial institutions for distribution services or shareholder
services.
The Plan is designed to compensate the Distributor for its services, not to
reimburse the Distributor for its expenses, and the Distributor may retain any
portion of the fee that it does not expend in fulfillment of its obligations to
the Fund.
EXPENSES. Each Portfolio is responsible for payment of certain other fees
and expenses (including legal fees, accountants' fees, custodial fees, and
printing and mailing costs) specified in the Administration and Distribution
Agreements.
PURCHASE OF SHARES
Class A and Class B shares of each Portfolio may be purchased, without sales
commission, at the net asset value per share next determined after receipt of
the purchase order by the Portfolio. See "Valuation of Shares."
MINIMUM INVESTMENT AND ACCOUNT SIZES; CONVERSION FROM CLASS A TO CLASS B SHARES
For a Portfolio account opened on or after January 2, 1996 (a "New
Account"), the minimum initial investment and minimum account size are $500,000
for Class A shares and $100,000 for Class B shares. Managed Accounts may
purchase Class A shares without being subject to such minimum initial investment
or minimum account size requirements for a Portfolio account. Officers of the
Adviser and its affiliates are subject to the minimums for a Portfolio account,
except they may purchase Class B shares subject to a minimum initial investment
and minimum account size of $5,000 for a Portfolio account.
If the value of a New Account containing Class A shares falls below $500,000
(but remains at or above $100,000) because of shareholder redemption(s), the
Fund will notify the shareholder, and if the account value remains below
$500,000 (but remains at or above $100,000) for a continuous 60-day period, the
Class A shares in such account will convert to Class B shares and will be
subject to the distribution fee and other features
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<PAGE>
applicable to the Class B shares. The Fund, however, will not convert Class A
shares to Class B shares based solely upon changes in the market that reduce the
net asset value of shares. Under current tax law, conversions between share
classes are not a taxable event to the shareholder.
Shares in a Portfolio account opened prior to January 2, 1996 (a "Pre-1996
Account") were designated Class A shares on January 2, 1996. Shares in a
Pre-1996 Account with a value of $100,000 or more on March 1, 1996 (a
"Grandfathered Class A Account") remained Class A shares regardless of account
size thereafter. Except for shares in a Managed Account, shares in a Pre-1996
Account with a value of less than $100,000 on March 1, 1996 (a "Grandfathered
Class B Account") converted to Class B shares on March 1, 1996. Grandfathered
Class A Accounts and Managed Accounts are not subject to conversion from Class A
shares to Class B shares.
Investors may also invest in the Fund by purchasing shares through a trust
department, broker, dealer, agent, financial planner, financial services firm or
investment adviser. An investor may be charged an additional service or
transaction fee by that institution. The minimum investment levels may be waived
at the discretion of the Adviser for (i) certain employees and customers of
Morgan Stanley or its affiliates and certain trust departments, brokers,
dealers, agents, financial planners, financial services firms, or investment
advisers that have entered into an agreement with Morgan Stanley or its
affiliates; and (ii) retirement and deferred compensation plans and trusts used
to fund such plans, including, but not limited to, those defined in Section
401(a), 403(b) or 457 of the Internal Revenue Code of 1986, as amended, and
"rabbi trusts". The Fund reserves the right to modify or terminate the
conversion features of the shares as stated above at any time upon 60-days'
notice to shareholders.
MINIMUM ACCOUNT SIZES AND INVOLUNTARY REDEMPTION OF SHARES
If the value of a New Account falls below $100,000 because of shareholder
redemption(s), the Fund will notify the shareholder, and if the account value
remains below $100,000 for a continuous 60-day period, the shares in such
account are subject to redemption by the Fund and, if redeemed, the net asset
value of such shares will be promptly paid to the shareholder. The Fund,
however, will not redeem shares based solely upon changes in the market that
reduce the net asset value of shares.
For purposes of redemptions by the Fund, the foregoing minimum account size
requirements do not apply to New Accounts containing Class B shares held by
officers of the Adviser or its affiliates. However, if the value of such account
held by an officer of the Adviser or its affiliates falls below $5,000 because
of shareholder redemption(s), the Fund will notify the shareholder, and if the
account value remains $5,000 for a continuous 60-day period, the shares in such
account are subject to redemption by the Fund and, if redeemed, the net asset
value of such shares will be promptly paid to the shareholder.
Grandfathered Class A Accounts, Grandfathered Class B Accounts and Managed
Accounts are not subject to involuntary redemption.
The Fund reserves the right to modify or terminate the involuntary
redemption features of the shares as stated above at any time upon 60-days'
notice to shareholders.
CONVERSION FROM CLASS B TO CLASS A SHARES
If the value of Class B shares in a Portfolio account increases, whether due
to shareholder share purchases or market activity, to $500,000 or more, the
Class B shares will convert to Class A shares. Under current tax law, such
conversion is not a taxable event to the shareholder. Class A shares converted
from Class B shares are
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<PAGE>
subject to the same minimum account size requirements that are applicable to New
Accounts containing Class A shares, as stated above. The Fund reserves the right
to modify or terminate this conversion feature at any time upon 60-days' notice
to shareholders.
INITIAL PURCHASES DIRECTLY FROM THE FUND
The Fund's determination of an investor's eligibility to purchase shares of
a given class will take precedence over the investor's selection of a class.
Assuming the investor is eligible for the class, the Fund will select the most
favorable class for the investor, if the investor has not done so.
1) BY CHECK. An account may be opened by completing and signing an Account
Registration Form and mailing it, together with a check ($500,000 minimum for
Class A shares of the Portfolios and $100,000 for Class B shares of the
Portfolios, with certain exceptions for Morgan Stanley employees and select
customers) payable to "Morgan Stanley Institutional Fund, Inc. -- [portfolio
name]", to:
Morgan Stanley Institutional Fund, Inc.
P.O. Box 2798
Boston, Massachusetts 02208-2798
Payment will be accepted only in U.S. dollars, unless prior approval for
payment by other currencies is given by the Fund. The Classes of shares of the
Portfolio(s) to be purchased should be designated on the Account Registration
Form. For purchases by check, the Fund is ordinarily credited with Federal
Funds within one business day. Thus, your purchase of shares by check is
ordinarily credited to your account at the net asset value per share of each
of the relevant Portfolios determined on the next business day after receipt.
2) BY FEDERAL FUNDS WIRE. Purchases may be made by having your bank wire
Federal Funds to the Fund's bank account. In order to ensure prompt receipt
of your Federal Funds Wire, it is important that you follow these steps:
A. Telephone the Fund (toll free: 1-800-548-7786) and provide us with your
name, address, telephone number, Social Security or Tax Identification
Number, the portfolio(s) selected, the class selected, the amount being
wired, and by which bank. We will then provide you with a Fund account
number. (Investors with existing accounts should also notify the Fund prior
to wiring funds.)
B. Instruct your bank to wire the specified amount to the Fund's Wire
Concentration Bank Account (be sure to have your bank include the name of
the portfolio(s) selected, the class selected and the account number
assigned to you) as follows:
Chase Manhattan Bank, N.A.
One Manhattan Plaza
New York, NY 10081-1000
ABA #021000021
DDA #91-02-733293
Attn: Morgan Stanley Institutional Fund, Inc.
Ref: (Portfolio name, your account number, your account name)
Please call the Fund at 1-800-548-7786 prior to wiring funds.
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<PAGE>
C. Complete the Account Registration Form and mail it to the address shown
thereon.
Purchase orders for shares of the Portfolios which are received prior to the
regular close of the NYSE (currently 4:00 p.m. Eastern Time) will be executed
at the price computed on the date of receipt as long as the Transfer Agent
receives payment by check or in Federal Funds prior to the regular close of
the NYSE on such day.
Federal Funds purchase orders will be accepted only on a day on which the Fund
and Chase (the "Custodian Bank") are open for business. Your bank may charge a
service fee for wiring Federal Funds.
3) BY BANK WIRE. The same procedure outlined under "By Federal Funds Wire"
above must be followed in purchasing shares by bank wire. However, money
transferred by bank wire may or may not be converted into Federal Funds the
same day, depending on the time the money is received and the bank handling
the wire. Prior to such conversion, an investor's money will not be invested.
Your bank may charge a service fee for wiring funds.
ADDITIONAL INVESTMENTS
You may add to your account at any time (minimum additional investment
$1,000 except for automatic reinvestment of dividends and capital gains
distributions for which there are no minimums) by purchasing shares at net asset
value by mailing a check to the Fund (payable to "Morgan Stanley Institutional
Fund, Inc. -- [portfolio name]") at the above address or by wiring monies to the
Custodian Bank as outlined above. It is very important that your account name,
the portfolio name and the class selected be specified in the letter or wire to
assure proper crediting to your account. In order to insure that your wire
orders are invested promptly, you are requested to notify one of the Fund's
representatives (toll free: 1-800-548-7786) prior to the wire date. Additional
investments will be applied to purchase additional shares in the same class held
by a shareholder in a Portfolio account.
OTHER PURCHASE INFORMATION
The purchase price of the Class A and Class B shares of each Portfolio is
the net asset value next determined after the order is received. See "Valuation
of Shares." An order received prior to the close of the New York Stock Exchange
("NYSE"), which is currently 4:00 p.m. Eastern Time, will be executed at the
price computed on the date of receipt; an order received after the close of the
NYSE will be executed at the price computed on the next day the NYSE is open as
long as the Transfer Agent receives payment by check or in Federal Funds prior
to the regular close of the NYSE on such day.
Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends. The net asset value of Class B shares will generally be
lower than the net asset value of Class A shares as a result of the distribution
expense charged to Class B shares. It is expected, however, that the net asset
value per share of the two classes will tend to converge immediately after the
recording of dividends which will differ by approximately the amount of the
distribution expense accrual differential between the classes.
In the interest of economy and convenience, and because of the operating
procedures of the Fund, certificates representing shares of the Portfolios will
not be issued. All shares purchased are confirmed to you and credited to your
account on the Fund's books maintained by the Adviser or its agents. You will
have the same rights and ownership with respect to such shares as if
certificates had been issued.
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To ensure that checks are collected by the Fund, withdrawals of investments
made by check are not presently permitted until payment for the purchase has
been received, which may take up to eight business days after the date of
purchase. As a condition of this offering, if a purchase is cancelled due to
nonpayment or because your check does not clear, you will be responsible for any
loss the Fund or its agents incur. If you are already a shareholder, the Fund
may redeem shares from your account(s) to reimburse the Fund or its agents for
any loss. In addition, you may be prohibited or restricted from making future
investments in the Fund.
Investors may also invest in the Fund by purchasing shares through the
Distributor.
EXCESSIVE TRADING
Frequent trades involving either substantial portfolio assets or a
substantial portion of your account or accounts controlled by you can disrupt
management of a Portfolio and raise its expenses. Consequently, in the interest
of all the stockholders of the Portfolio and the Portfolio's performance, the
Fund may in its discretion bar a stockholder that engages in excessive trading
of shares of a Portfolio from further purchases of shares of the Fund for an
indefinite period. The Fund considers excessive trading to be more than one
purchase and sale involving shares of the same Portfolio within any 120-day
period. For example, exchanging shares of Portfolio A for shares of Portfolio B,
then exchanging shares of Portfolio B for shares of Portfolio C of the Fund and
again exchanging the shares of Portfolio C for shares of Portfolio B within a
120-day period amounts to excessive trading. Two types of transactions are
exempt from these excessive trading restrictions: (1) trades exclusively between
money market portfolios, and (2) trades done in connection with an asset
allocation service managed or advised by MSAM and/or any of its affiliates.
REDEMPTION OF SHARES
You may withdraw all or any portion of the amount in your account by
redeeming shares at any time. Please note that purchases made by check are not
permitted to be redeemed until payment of the purchase price has been collected,
which may take up to eight business days after purchase. The Fund will redeem
Class A shares or Class B shares of a Portfolio at the next determined net asset
value of shares of the applicable class. On days that both the NYSE and the
Custodian Bank are open for business, the net asset value per share of each of
the Portfolios is determined at the close of trading of the NYSE (currently 4:00
p.m. Eastern Time). Shares of the Portfolios may be redeemed by mail or
telephone. No charge is made for redemption. Any redemption may be more or less
than the purchase price of your shares depending on, among other factors, the
market value of the investment securities held by the Portfolios.
BY MAIL
Each Portfolio will redeem its Class A shares or Class B shares at the net
asset value determined on the date the request is received, if the request is
received in "good order" before the regular close of the NYSE. Your request
should be addressed to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798,
Boston, Massachusetts 02208-2798, except that deliveries by overnight courier
should be addressed to Morgan Stanley Institutional Fund, Inc., c/o Chase Global
Funds Services Company, 73 Tremont Street, Boston, Massachusetts 02108-3913.
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"Good order" means that the request to redeem shares must include the
following documentation:
(a) A letter of instruction or a stock assignment specifying the class
and number of shares or dollar amount to be redeemed, signed by all
registered owners of the shares in the exact names in which they are
registered;
(b) Any required signature guarantees (see "Further Redemption
Information" below); and
(c) Other supporting legal documents, if required, in the case of
estates, trusts, guardianships, custodianships, corporations, pension and
profit sharing plans and other organizations.
Shareholders who are uncertain of requirements for redemption should consult
with a Morgan Stanley Institutional Fund representative.
BY TELEPHONE
Provided you have previously elected the Telephone Redemption Option on the
Account Registration Form, you can request a redemption of your shares by
calling the Fund and requesting the redemption proceeds be mailed to you or
wired to your bank. Please contact one of Morgan Stanley Institutional Fund's
representatives for further details. In times of drastic market conditions, the
telephone redemption option may be difficult to implement. If you experience
difficulty in making a telephone redemption, your request may be made by mail or
overnight courier and will be implemented at the net asset value next determined
after it is received. Redemption requests sent to the Fund through express mail
must be mailed to the address of the Dividend Disbursing and Transfer Agent
listed under "General Information". The Fund and the Fund's transfer agent (the
"Transfer Agent") will employ reasonable procedures to confirm that the
instructions communicated by telephone are genuine. These procedures include
requiring the investor to provide certain personal identification information at
the time an account is opened and prior to effecting each transaction requested
by telephone. In addition, all telephone transaction requests will be recorded
and investors may be required to provide additional telecopied written
instructions regarding transaction requests. Neither the Fund nor the Transfer
Agent will be responsible for any loss, liability, cost or expense for following
instructions received by telephone that either of them reasonably believes to be
genuine.
To change the commercial bank or account designated to receive redemption
proceeds, a written request must be sent to the Fund at the address above.
Requests to change the bank or account must be signed by each shareholder and
each signature must be guaranteed.
FURTHER REDEMPTION INFORMATION
Normally the Fund will make payment for all shares redeemed within one
business day of receipt of the request, but in no event will payment be made
more than seven days after receipt of a redemption request in good order.
However, payments to investors redeeming shares which were purchased by check
will not be made until payment for the purchase has been collected, which may
take up to eight days after the date of purchase. The Fund may suspend the right
of redemption or postpone the date upon which redemptions are effected at times
when the NYSE is closed, or under any emergency circumstances as determined by
the Securities and Exchange Commission (the "Commission").
If the Board of Directors determines that it would be detrimental to the
best interests of the remaining shareholders of a Portfolio to make payment
wholly or partly in cash, the Fund may pay the redemption proceeds
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in whole or in part by a distribution in-kind of securities held by the
Portfolio in lieu of cash in conformity with applicable rules of the Commission.
Distributions-in-kind will be made in readily marketable securities. Investors
may incur brokerage charges on the sale of portfolio securities so received in
payment of redemptions.
To protect your account, the Fund and its agents from fraud, signature
guarantees are required for certain redemptions to verify the identity of the
person who has authorized a redemption from your account. Please contact the
Fund for further information. See "Redemption of Shares" in the Statement of
Additional Information.
SHAREHOLDER SERVICES
EXCHANGE FEATURES
You may exchange shares that you own in the Portfolios for shares of any
other available portfolio of the Fund (other than the International Equity
Portfolio, which is closed to new investors). In exchanging for shares of a
portfolio with more than one class, the class of shares you receive in the
exchange will be determined in the same manner as any other purchase of shares
and will not be based on the class of shares surrendered for the exchange.
Consequently, the same minimum initial investment and minimum account size for
determining the class of shares received in the exchange will apply. See
"Purchase of Shares." Shares of the portfolios may be exchanged by mail or
telephone. The privilege to exchange shares by telephone is automatic and made
available without shareholder election. Before you make an exchange, you should
read the prospectus of the portfolio(s) in which you seek to invest. Because an
exchange transaction is treated as a redemption followed by a purchase, an
exchange would be considered a taxable event for shareholders subject to tax.
The exchange privilege is only available with respect to portfolios that are
registered for sale in a shareholder's state of residence. The exchange
privilege may be modified or terminated by the Fund at any time upon 60-days'
notice to shareholders.
BY MAIL
In order to exchange shares by mail, you should include in the exchange
request the name, class of shares and account number of your current portfolio,
the name of the portfolio(s) and the class(es) of shares of the portfolio(s)
into which you intend to exchange shares, and the signatures of all registered
account holders. Send the exchange request to Morgan Stanley Institutional Fund,
P.O. Box 2798, Boston, Massachusetts 02208-2798.
BY TELEPHONE
When exchanging shares by telephone, have ready the name, class of shares
and account number of the current Portfolio, the name(s) of the portfolio(s) and
class(es) of shares into which you intend to exchange shares, your Social
Security number or Tax I.D. number, and your account address. Requests for
telephone exchanges received prior to 4:00 p.m. (Eastern Time) are processed at
the close of business that same day based on the net asset value of the
class(es) of the portfolios at the close of business. Requests received after
4:00 p.m. (Eastern Time) are processed the next business day based on the net
asset value determined at the close of business on such day. For additional
information regarding responsibility for the authenticity of telephoned
instructions, see "Redemption of Shares -- By Telephone" above.
TRANSFER OF REGISTRATION
You may transfer the registration of any of your Fund shares to another
person by writing to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798,
Boston, Massachusetts 02208-2798. As in the case of redemptions, the
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<PAGE>
written request must be received in good order before any transfer can be made.
Transferring the registration of shares may affect the eligibility of your
account for a given class of a Portfolio's shares and may result in involuntary
conversion or redemption of your shares. See "Purchase of Shares" above.
VALUATION OF SHARES
The net asset value per share of a class of shares of each of the Portfolios
is determined by dividing the total market value of the Portfolio's investments
and other assets attributable to such class, less any liabilities attributable
to such class, by the total number of outstanding shares of such class of the
Portfolio. Net asset value is calculated separately for each class of a
Portfolio. Net asset value per share is determined as of the close of the NYSE
on each day that the NYSE is open for business. Price information on listed
securities is taken from the exchange where the security is primarily traded.
Securities listed on a U.S. securities exchange for which market quotations are
available are valued at the last quoted sale price on the day the valuation is
made. Securities listed on a foreign exchange are valued at their closing price.
Unlisted securities and listed securities not traded on the valuation date for
which market quotations are not readily available are valued at a price that is
considered to best represent fair value within a range not in excess of the
current asked price nor less than the current bid price. The current bid and
asked prices are determined based on the bid and asked prices quoted on such
valuation date by reputable brokers.
Bonds and other fixed income securities are valued according to the broadest
and most representative market, which will ordinarily be the over-the-counter
market. Net asset value includes interest on fixed income securities, which is
accrued daily. In addition, bonds and other fixed income securities may be
valued on the basis of prices provided by a pricing service when such prices are
believed to reflect the fair market value of such securities. The prices
provided by a pricing service are determined without regard to bid or last sale
prices, but take into account institutional-size trading in similar groups of
securities and any developments related to the specific securities. Securities
not priced in this manner are valued at the most recently quoted sale price, or
when securities exchange valuations are used, at the latest quoted bid price on
the day of valuation. If there is no such reported sale, the latest quoted bid
price will be used. Securities purchased with remaining maturities of 60 days or
less are valued at amortized cost, if it approximates market value. In the event
that amortized cost does not approximate market value, market prices as
determined above will be used.
The value of other assets and securities for which no quotations are readily
available (including restricted and unlisted foreign securities) and those
securities for which it is inappropriate to determine prices in accordance with
the above-stated procedures are determined in good faith at fair value using
methods determined by the Board of Directors. For purposes of calculating net
asset value per share, all assets and liabilities initially expressed in foreign
currencies will be translated into U.S. dollars at the mean of the bid price and
asked price of such currencies against the U.S. dollar as quoted by a major
bank.
Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends for the class. Dividends will differ by approximately the
amount of the distribution expense accrual differential among the classes. The
net asset value of Class B shares will generally be lower than the net asset
value of the Class A shares as a result of the distribution expense charged to
Class B shares.
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PERFORMANCE INFORMATION
The Fund may from time to time advertise total return for each class of the
Portfolios. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT INTENDED
TO INDICATE FUTURE PERFORMANCE. The "total return" shows what an investment in a
class of a Portfolio would have earned over a specified period of time (such as
one, five or ten years), assuming that all distributions and dividends by the
Portfolio were reinvested in the same class on the reinvestment dates during the
period. Total return does not take into account any federal or state income
taxes that may be payable on dividends and distributions or upon redemption. The
Fund may also include comparative performance information in advertising or
marketing the Portfolio's shares, including data from Lipper Analytical
Services, Inc., other industry publications, business periodicals, rating
services and market indices.
The performance figures for Class B shares will generally be lower than
those for Class A shares because of the distribution fee charged to Class B
shares.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All income dividends and capital gains distributions for a class of shares
will be automatically reinvested in additional shares of such class at net asset
value, except that, upon written notice to the Fund or by checking off the
appropriate box in the Distribution Option Section on the Account Registration
Form, a shareholder may elect to receive income dividends and capital gains
distributions in cash.
The Emerging Growth and the MicroCap Portfolios expect to distribute
substantially all of their net investment income in the form of annual dividends
and the Equity Growth and the Aggressive Equity Portfolios expect to distribute
substantially all of their net investment income in the form of quarterly
dividends. Net realized gains for each Portfolio, if any, after reduction for
any available tax loss carryforwards will also be distributed annually.
Confirmations of the purchase of shares of each Portfolio through the automatic
reinvestment of income dividends and capital gains distributions will be
provided, pursuant to Rule 10b-10(b) under the Securities Exchange Act of 1934,
as amended, on the next monthly client statement following such purchase of
shares. Consequently, confirmations of such purchases will not be provided at
the time of completion of such purchases, as might otherwise be required by Rule
10b-10.
Undistributed net investment income is included in each Portfolio's net
assets for the purpose of calculating net asset value per share. Therefore, on
the "ex-dividend" date, the net asset value per share excludes the dividend
(i.e., is reduced by the per share amount of the dividend). Dividends paid
shortly after the purchase of shares by an investor, although in effect a return
of capital, are taxable to shareholders subject to income tax.
Because of the distribution fee and any other expenses that may be
attributable to the Class B shares, the net income attributable to and the
dividends payable on Class B shares will be lower than the net income
attributable to and the dividends payable on Class A shares. As a result, the
net asset value per share of the classes of the Portfolios will differ at times.
Expenses of the Portfolio allocated to a particular class of shares thereof will
be borne on a pro rata basis by each outstanding share of that class.
TAXES
The following summary of certain federal income tax consequences is based on
current tax laws and regulations, which may be changed by legislative, judicial,
or administrative action.
35
<PAGE>
No attempt has been made to present a detailed explanation of the federal,
state, or local income tax treatment of a Portfolio or its shareholders.
Accordingly, shareholders are urged to consult their tax advisors regarding
specific questions as to federal, state and local income taxes.
Each Portfolio is treated as a separate entity for federal income tax
purposes and is not combined with the Fund's other portfolios. It is each
Portfolio's intent to continue to qualify for the special tax treatment afforded
regulated investment companies under the Code, so that the Portfolio will
continue to be relieved of federal income tax on that part of its net investment
income and net capital gain that is distributed to shareholders.
Each Portfolio distributes substantially all of its net investment income
(including, for this purpose, the excess of net short-term capital gain over net
long-term capital loss) to shareholders. Dividends from a Portfolio's net
investment income are taxable to shareholders as ordinary income, whether
received in cash or in additional shares. Such dividends paid by a Portfolio
will generally qualify for the 70% dividends-received deduction for corporate
shareholders to the extent of qualifying dividend income received by the
Portfolio from U.S. corporations. Each Portfolio will report annually to its
shareholders the amount of dividend income qualifying for such treatment.
Distributions of net capital gain (the excess of net long-term capital gain
over net short-term capital loss) are taxable to shareholders as long-term
capital gain, regardless of how long shareholders have held their shares. Each
Portfolio sends reports annually to its shareholders of the federal income tax
status of all distributions made during the preceding year.
Each Portfolio intends to make sufficient distributions or deemed
distributions of its ordinary income and capital gain net income (the excess of
short-term and long-term capital gains over short-term and long-term capital
losses), prior to the end of each calendar year to avoid liability for federal
excise tax.
Dividends and other distributions declared by a Portfolio in October,
November or December of any year and payable to shareholders of record on a date
in such month will be deemed to have been paid by the Portfolio and received by
the shareholders on December 31 of that year if the distributions are paid by
the Portfolio at any time during the following January.
The sale, redemption, or exchange of shares may result in taxable gain or
loss to the selling, exchanging or redeeming shareholder, depending upon whether
the fair market value of the sale, exchange or redemption proceeds exceeds or is
less than the shareholder's adjusted basis in the sold, exchanged or redeemed
shares. Any such taxable gain or loss generally will be treated as long-term
capital gain or loss if the shares have been held for more than one year and
otherwise generally will be treated as short-term capital gain or loss. If
capital gain distributions have been made with respect to shares that are sold
at a loss after being held for six months or less, however, then the loss is
treated as a long-term capital loss to the extent of the capital gain
distributions.
Investment income received by a Portfolio from sources within foreign
countries may be subject to foreign income taxes withheld at the source. To the
extent that a Portfolio is liable for foreign income taxes so withheld, it is
not expected that a Portfolio or its shareholders would be able to claim a
credit for U.S. tax purposes with respect to any such foreign taxes.
The conversion of Class A shares to Class B shares should not be a taxable
event to the shareholder.
36
<PAGE>
Shareholders are urged to consult with their tax advisors concerning the
application of state and local income taxes to investments in a Portfolio, which
may differ from the federal income tax consequences described above.
THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED HEREIN FOR GENERAL
INFORMATION ONLY. PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS
WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN A PORTFOLIO.
PORTFOLIO TRANSACTIONS
The Investment Advisory Agreement authorizes the Adviser to select the
brokers or dealers that will execute the purchases and sales of investment
securities for the Portfolios and directs the Adviser to use its best efforts to
obtain the best available price and most favorable execution with respect to all
transactions for the Portfolios. The Fund has authorized the Adviser to pay
higher commissions in recognition of brokerage services which, in the opinion of
the Adviser, are necessary for the achievement of better execution, provided the
Adviser believes this to be in the best interest of the Fund.
Since shares of the Portfolios are not marketed through intermediary brokers
or dealers, it is not the Fund's practice to allocate brokerage or principal
business on the basis of sales of shares which may be made through such firms.
However, the Adviser may place portfolio orders with qualified broker-dealers
who recommend the Fund's portfolios or who act as agents in the purchase of
shares of the Fund's portfolios for their clients.
In purchasing and selling securities for the Portfolios, it is the Fund's
policy to seek to obtain quality execution at the most favorable prices through
responsible broker-dealers. In selecting broker-dealers to execute the
securities transactions for the Portfolios, consideration will be given to such
factors as the price of the security, the rate of the commission, the size and
difficulty of the order, the reliability, integrity, financial condition,
general execution and operational capabilities of competing broker-dealers, and
the brokerage and research services which they provide to the Fund. Some
securities considered for investment by the Portfolios may also be appropriate
for other clients served by the Adviser. If the purchase or sale of securities
consistent with the investment policies of the Portfolios and one or more of
these other clients served by the Adviser is considered at or about the same
time, transactions in such securities will be allocated among the Portfolios and
such other clients in a manner deemed fair and reasonable by the Adviser.
Although there is no specified formula for allocating such transactions, the
various allocation methods used by the Adviser, and the results of such
allocations, are subject to periodic review by the Fund's Board of Directors.
Subject to the overriding objective of obtaining the best possible execution
of orders, the Adviser may allocate a portion of the Portfolio's brokerage
transactions to Morgan Stanley or broker affiliates of Morgan Stanley. In order
for Morgan Stanley or its affiliates to effect any portfolio transactions for
the Fund, the commissions, fees or other remuneration received by Morgan Stanley
or such affiliates must be reasonable and fair compared to the commissions, fees
or other remuneration paid to other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time. Furthermore, the Board
of Directors of the Fund, including a majority of those
37
<PAGE>
Directors who are not "interested persons," as defined in the 1940 Act, have
adopted procedures which are reasonably designed to provide that any
commissions, fees or other remuneration paid to Morgan Stanley or such
affiliates are consistent with the foregoing standard.
Portfolio securities will not be purchased from or through, or sold to or
through, the Adviser or Morgan Stanley or any "affiliated persons," as defined
in the 1940 Act of Morgan Stanley when such entities are acting as principals,
except to the extent permitted by law.
Although none of the Portfolios will invest for short-term trading purposes,
investment securities may be sold from time to time without regard to the length
of time they have been held. For the Equity Growth, Emerging Growth and MicroCap
Portfolios, it is anticipated that, under normal circumstances, the annual
portfolio turnover rate will not exceed 100%. However, the annual portfolio
turnover rate of the Equity Growth Portfolio for the fiscal year ended December
31, 1994 was 146%. For the Aggressive Equity Portfolio, the annual portfolio
turnover rate is expected to exceed 100%. High portfolio turnover involves
correspondingly greater transaction costs which will be borne directly by the
respective Portfolio. In addition, high portfolio turnover may result in more
capital gains which would be taxable to the shareholders of the respective
Portfolio. The tables set forth in "Financial Highlights" present the
Portfolios' historical turnover rates.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
The Fund was organized as a Maryland corporation on June 16, 1988. The
Articles of Incorporation, as amended and restated, permit the Fund to issue up
to 34 billion shares of common stock, with $.001 par value per share. Pursuant
to the Fund's Articles of Incorporation, the Board of Directors may increase the
number of shares the Fund is authorized to issue without the approval of the
shareholders of the Fund. Subject to the notice period to shareholders with
respect to shares held by the shareholders, the Board of Directors has the power
to designate one or more classes of shares of common stock and to classify and
reclassify any unissued shares with respect to such classes. The shares of
common stock of each portfolio are currently classified into two classes, the
Class A shares and the Class B shares, except for the International Small Cap,
Money Market and Municipal Money Market Portfolios, which only offer Class A
shares.
The shares of the Portfolios, when issued, will be fully paid,
nonassessable, fully transferable and redeemable at the option of the holder.
The shares have no preference as to conversion, exchange, dividends, retirement
or other features and have no pre-emptive rights. The shares of each portfolio
have non-cumulative voting rights, which means that the holders of more than 50%
of the shares voting for the election of Directors can elect 100% of the
Directors if they choose to do so. Persons or organizations owning 25% or more
of the outstanding shares of a Portfolio may be presumed to "control" (as
defined in the 1940 Act) such Portfolio. Under Maryland law, the Fund is not
required to hold an annual meeting of its shareholders unless required to do so
under the 1940 Act.
REPORTS TO SHAREHOLDERS
The Fund will send to its shareholders annual and semi-annual reports; the
financial statements appearing in annual reports are audited by independent
accountants. Monthly unaudited portfolio data is also available from the Fund
upon request.
38
<PAGE>
In addition, the Adviser or its agent, as Transfer Agent, will send to each
shareholder having an account directly with the Fund a monthly statement showing
transactions in the account, the total number of shares owned, and any dividends
or distributions paid.
CUSTODIAN
As of September 1, 1995, domestic securities and cash are held by Chase,
which replaced U.S. Trust as the Fund's domestic custodian. Chase is not an
affiliate of the Adviser or the Distributor. Morgan Stanley Trust Company,
Brooklyn, New York ("MSTC"), an affiliate of the Adviser and the Distributor,
acts as the Fund's custodian for foreign assets held outside the United States
and employs subcustodians approved by the Board of Directors of the Fund in
accordance with regulations of the Securities and Exchange Commission for the
purpose of providing custodial services for such assets. MSTC may also hold
certain domestic assets for the Fund. For more information on the custodians,
see "General Information -- Custody Arrangements" in the Statement of Additional
Information.
DIVIDEND DISBURSING AND TRANSFER AGENT
Chase Global Funds Services Company, 73 Tremont Street, Boston,
Massachusetts 02108-3913, acts as Dividend Disbursing and Transfer Agent for the
Fund.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP serves as independent accountants for the Fund and
audits the annual financial statements of each Portfolio.
LITIGATION
The Fund is not involved in any litigation.
39
<PAGE>
<TABLE>
<CAPTION>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
EQUITY GROWTH, EMERGING GROWTH, MICROCAP AND
AGGRESSIVE EQUITY PORTFOLIOS
P.O. BOX 2798, BOSTON, MA 02208-2798
- ---------------------------------------------------------------------------------------------------------------
ACCOUNT REGISTRATION FORM
- ---------------------------------------------------------------------------------------------------------------
<S> <C>
ACCOUNT INFORMATION If you need assistance in filling out this form
Fill in where applicable for the Morgan Stanley Institutional Fund, please
contact your Morgan Stanley representative or call
us toll free 1-(800)-548-7786. Please print all
items except signature, and mail to the Fund at the
address above.
- ---------------------------------------------------------------------------------------------------------------
A) REGISTRATION
1. INDIVIDUAL 1. / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
First Name Initial Last Name
2. JOINT TENANTS 2. / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
(RIGHTS OF First Name Initial Last Name
SURVIVORSHIP / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
PRESUMED UNLESS First Name Initial Last Name
TENANCY IN COMMON
IS INDICATED)
- ---------------------------------------------------------------------------------------------------------------
3. CORPORATIONS, 3. / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
TRUSTS AND OTHERS
Please call the / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
Fund for additional
documents that may / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
be required to set
up account and to
authorize transactions.
Type of / / INCORPORATED / / UNINCORPORATED / / PARTNERSHIP / / UNIFORM GIFT/TRANSFER TO MINOR
Registration: ASSOCIATION (ONLY ONE CUSTODIAN AND MINOR PERMITTED)
/ / TRUST __________________________________ / / OTHER (Specify) ______________________________
- ---------------------------------------------------------------------------------------------------------------
B) MAILING ADDRESS Street or P.O. Box / / / / / / / / / / / / / / / / / / / / / / / / / / / /
Please fill in
completely, including City / / / / / / / / / / / / / State / / / Zip / / / / / /-/ / / / / / / /
telephone number(s).
Home Business
Telephone No./ / / /-/ / / /-/ / / / / Telephone No./ / / /-/ / / /-/ / / /
/ / United States / / Resident / /Non-Resident Alien:
Citizen Alien Indicate Country of Residence _________
- ---------------------------------------------------------------------------------------------------------------
C) TAXPAYER PART 1. Enter your Taxpayer C) IMPORTANT TAX INFORMATION
IDENTIFICATION Identification Number. For most You (as a payee) are required by
NUMBER individual taxpayers, this is your law to provide us (as payer) with
If the account is in Social Security Number. your correct Taxpayer Identification
more than one name, TAXPAYER IDENTIFICATION NUMBER Number. Accounts that have a missing
CIRCLE THE NAME OF THE / / / /-/ / / / / / / / / or incorrect Taxpayer Identification
PERSON WHOSE TAXPAYER OR Number will be subject to backup
IDENTIFICATION NUMBER SOCIAL SECURITY NUMBER withholding at a 31% rate on the dividends,
IS PROVIDED IN SECTION / / / /-/ / /-/ / / / / distributions and other payments.
A) ABOVE. If no name PART 2. BACKUP WITHHOLDING If you have not provided us with
is circled, the number / / Check this box if you are your correct taxpayer identification
will be considered to be NOT subject to Backup number, you may be subject to
that of the last name Withholding under the a $50 penalty imposed by the Internal
listed. For Custodian provisions of Section Revenue Service.
account of a minor 3406(a)(1)(C) of the Internal Backup withholding is not an
(Uniform Gifts/Transfers Revenue Code. additional tax; the tax liability of
to Minor Acts), give the persons subject to backup withholding
Social Security Number will be reduced by the amount of tax
of the minor. withheld. If withholding results in
an overpayment of taxes, a refund
may be obtained.
You may be notified
that you are subject to backup
withholding under Section 3406(a)(1)(C)
of the Internal Revenue Code because you
have underreported interest or dividends
or you were required to but failed to
file a return which would have included a
reportable interest or dividend payment. IF
YOU HAVE NOT BEEN SO NOTIFIED, CHECK THE
BOX IN PART 2 AT LEFT.
- ---------------------------------------------------------------------------------------------------------------
D) PORTFOLIO AND For Purchase of the following Portfolio(s):
CLASS SELECTION Equity Growth Portfolio / / Class A Shares $____ / / Class B Shares $____
(Class A shares Emerging Growth Portfolio / / Class A Shares $____ / / Class B Shares $____
minimum $500,000 MicroCap Portfolio / / Class A Shares $____ / / Class B Shares $____
for each Portfolio Aggressive Equity Portfolio / / Class A Shares $____ / / Class B Shares $____
and Class B shares
minimum $100,000 for Total Initial Investment $_____________
each Portfolio).
Please indicate
Portfolio class and
amount.
- ---------------------------------------------------------------------------------------------------------------
E) METHOD OF Payment by:
INVESTMENT / / Check (MAKE CHECK PAYABLE TO MORGAN STANLEY INSTITUTIONAL FUND, INC.--PORTFOLIO NAME)
Please
indicate
manner of / / Exchange $____________ From________________ / / / / / / / / / / /-/ /
payment. Name of Portfolio Account No.
/ / Account previously established by:
/ / Phone exchange / / Wire on___________________ / / / / / / / / / / / /-/ /
Date Account No. (Check
(Previously assigned by the Fund) Digit)
<PAGE>
- ---------------------------------------------------------------------------------------------------------------
F) DISTRIBUTION Income dividends and capital gains distributions (if any) will
OPTION be reinvested in additional shares unless either box below is
checked.
/ / Income dividends to be paid in cash, capital
gains distributions (if any) in shares.
/ / Income dividends and capital gains distributions
(if any) to be paid in cash.
- ---------------------------------------------------------------------------------------------------------------
G) TELEPHONE / / I/we hereby authorize the Fund and its ______________________ ________________
REDEMPTION agents to honor any telephone requests Name of COMMERCIAL Bank Bank Account No.
Please select at time of to wire redemption proceeds to the (Not Savings Bank)
initial application if you commercial bank indicated at right and/or
wish to redeem shares by mail redemption proceeds to the name and ________________
telephone. A SIGNATURE address in which my/our fund account is Bank ABA No.
GUARANTEE IS REQUIRED IF registered if such requests are believed
BANK ACCOUNT IS NOT to be authentic. _________________________________________________
REGISTERED IDENTICALLY TO The Fund and the Fund's Transfer Agent will Name(s) in which your BANK Account is Established
YOUR FUND ACCOUNT. employ reasonable procedures to confirm that
instructions communicated by telephone are _________________________________________________
TELEPHONE REQUESTS FOR genuine. These procedures include requiring Bank's Street Address
REDEMPTIONS WILL NOT BE the investor to provide certain personal
HONORED UNLESS THE BOX IS identification information at the time an _________________________________________________
CHECKED. account is opened and prior to effecting each City State Zip
transaction requested by telephone. In addition,
all telephone transaction requests will be recorded
and investors may be required to provide additional
telecopied written instructions of transaction
requests. Neither the Fund nor the Transfer Agent will
be responsible for any loss, liability, cost or expense
for following instructions received by telephone that
it reasonably believes to be genuine.
- ---------------------------------------------------------------------------------------------------------------
H) INTERESTED PARTY
OPTION
In addition to the account _________________________________________________________________
statement sent to my/our Name
registered address, I/we _________________________________________________________________
hereby authorize the fund
to mail duplicate _________________________________________________________________
statements to the name and Address
address provided at right.
_________________________________________________________________
City State Zip Code
- ---------------------------------------------------------------------------------------------------------------
I) DEALER
INFORMATION _______________________ _______________________________ ___________
Representative Name Representative No. Branch No.
- ---------------------------------------------------------------------------------------------------------------
J) SIGNATURE OF The undersigned certify that I/we have full authority and legal
ALL HOLDERS capacity to purchase and redeem shares of the Fund and affirm that I/we
AND TAXPAYER have received a current Prospectus of the Morgan Stanley Institutional
CERTIFICATION Fund, Inc. and agree to be bound by its terms. UNDER THE PENALTIES OF
Sign Here > PERJURY, I/WE CERTIFY THAT THE INFORMATION PROVIDED IN SECTION C)
ABOVE IS TRUE, CORRECT AND COMPLETE.
(X) (X)
__________________________________ ______________________________________
Signature Date Signature Date
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
(This page has been left blank intentionally.)
<PAGE>
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND OR THE DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER BY THE FUND OR THE DISTRIBUTOR TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION.
--------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
PAGE
----
Fund Expenses..................................... 2
Financial Highlights.............................. 5
Prospectus Summary................................ 9
Investment Objectives and Policies................ 13
Additional Investment Information................. 17
Investment Limitations............................ 24
Management of the Fund............................ 25
Purchase of Shares................................ 27
Redemption of Shares.............................. 31
Shareholder Services.............................. 33
Valuation of Shares............................... 34
Performance Information........................... 35
Dividends and Capital Gains Distributions......... 35
Taxes............................................. 36
Portfolio Transactions............................ 37
General Information............................... 38
Account Registration Form
</TABLE>
EQUITY GROWTH PORTFOLIO
EMERGING GROWTH PORTFOLIO
MICROCAP PORTFOLIO
AGGRESSIVE EQUITY PORTFOLIO
PORTFOLIOS OF THE
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
Common Stock
($.001 PAR VALUE)
-------------
PROSPECTUS
-------------
Investment Adviser
Morgan Stanley
Asset Management Inc.
Distributor
Morgan Stanley & Co.
Incorporated
- ---------------------------------
- ---------------------------------
- ---------------------------------
- ---------------------------------
<PAGE>
- --------------------------------------------------------------------------------
P R O S P E C T U S
----------------------------------------------------------------------
U.S. REAL ESTATE PORTFOLIO
PORTFOLIO OF THE
MORGAN STANLEY INSTITUTIONAL FUND, INC.
P.O. BOX 2798, BOSTON, MASSACHUSETTS 02208-2798
FOR INFORMATION CALL 1-800-548-7786
----------------
Morgan Stanley Institutional Fund, Inc. (the "Fund") is a no-load, open-end
management investment company, or mutual fund, which offers redeemable shares in
a series of diversified and non-diversified investment portfolios
("portfolios"). The Fund currently consists of twenty-eight portfolios
representing a broad range of investment choices. The Fund is designed to
provide clients with attractive alternatives for meeting their investment needs.
This prospectus (the "Prospectus") pertains to the Class A and the Class B
shares of the U.S. Real Estate Portfolio (the "Portfolio"). On January 2, 1996,
the Portfolio began offering two classes of shares: the Class A shares and the
Class B shares, except for the Money Market, Municipal Money Market and
International Small Cap Portfolios which only offer Class A shares. All shares
of the Portfolio owned prior to January 2, 1996 were redesignated Class A shares
on January 2, 1996. The Class A and Class B shares currently offered by the
Portfolio have different minimum investment requirements and fund expenses.
Shares of the portfolios are offered with no sales charge or exchange or
redemption fee (with the exception of the International Small Cap Portfolio).
INVESTORS SHOULD NOTE THAT THE PORTFOLIO MAY INVEST UP TO 10% OF ITS TOTAL
ASSETS IN RESTRICTED SECURITIES OTHER THAN RULE 144A SECURITIES AND NO MORE THAN
15% OF ITS TOTAL ASSETS IN RESTRICTED SECURITIES THAT ARE RULE 144A SECURITIES.
SEE "ADDITIONAL INVESTMENT INFORMATION -- NON-PUBLICLY TRADED SECURITIES,
PRIVATE PLACEMENTS AND RESTRICTED SECURITIES." INVESTMENTS IN RESTRICTED
SECURITIES IN EXCESS OF 5% OF A PORTFOLIO'S TOTAL ASSETS MAY BE CONSIDERED A
SPECULATIVE ACTIVITY, MAY INVOLVE GREATER RISK AND MAY INCREASE THE PORTFOLIO'S
EXPENSES.
The Fund is designed to meet the investment needs of discerning investors
who place a premium on quality and personal service. With Morgan Stanley Asset
Management Inc. as Adviser and Administrator (the "Adviser" and the
"Administrator"), and with Morgan Stanley & Co. Incorporated ("Morgan Stanley")
as Distributor, the Fund makes available to institutional investors and high net
worth individual investors a series of portfolios which benefit from the
investment expertise and commitment to excellence associated with Morgan Stanley
and its affiliates.
This Prospectus is designed to set forth concisely the information about the
Fund that a prospective investor should know before investing and it should be
retained for future reference. The Fund offers additional portfolios which are
described in other prospectuses and under "Prospectus Summary" below. The Fund
currently offers the following portfolios: (i) GLOBAL AND INTERNATIONAL EQUITY
- -- Active Country Allocation, Asian Equity, Emerging Markets, European Equity,
Global Equity, Gold, International Equity, International Magnum, International
Small Cap, Japanese Equity and Latin American Portfolios; (ii) U.S. EQUITY --
Emerging Growth, Equity Growth, Aggressive Equity, MicroCap, Small Cap Value
Equity, Value Equity and U.S. Real Estate Portfolios; (iii) EQUITY AND FIXED
INCOME -- Balanced Portfolio; (iv) FIXED INCOME -- Emerging Markets Debt, Fixed
Income, Global Fixed Income, High Yield, Mortgage-Backed Securities and
Municipal Bond Portfolios; and (v) MONEY MARKET -- Money Market and Municipal
Money Market Portfolios. Additional information about the Fund is contained in a
"Statement of Additional Information" dated May 1, 1996, which is incorporated
herein by reference. The Statement of Additional Information and the
prospectuses pertaining to the other portfolios of the Fund are available upon
request and without charge by writing or calling the Fund at the address and
telephone number set forth above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1996.
<PAGE>
FUND EXPENSES
The following table illustrates the expenses and fees that a shareholder of
the Portfolio will incur:
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
- --------------------------------------------------
<S> <C>
Maximum Sales Load Imposed on Purchases
Class A......................................... None
Class B......................................... None
Maximum Sales Load Imposed on Reinvested Dividends
Class A......................................... None
Class B......................................... None
Deferred Sales Load
Class A......................................... None
Class B......................................... None
Redemption Fees
Class A......................................... None
Class B......................................... None
Exchange Fees
Class A......................................... None
Class B......................................... None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- --------------------------------------------------
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<S> <C>
Management Fee (Net of Fee Waiver)*
Class A......................................... 0.47%
Class B......................................... 0.47%
12b-1 Fees
Class A......................................... None
Class B......................................... 0.25%
Other Expenses
Class A......................................... 0.53%
Class B......................................... 0.53%
---------
Total Operating Expenses (Net of Fee Waivers)*
Class A......................................... 1.00%
Class B......................................... 1.25%
---------
---------
</TABLE>
- ------------------------
*The Adviser has agreed to waive its management fees and/or to reimburse the
Portfolio, if necessary, if such fees would cause the Portfolio's total annual
operating expenses, as a percentage of average daily net assets, to exceed the
percentages set forth in the table above. Absent the fee waiver, the management
fee would be 0.80%. Absent the fee waiver and/or expense reimbursement, the
Portfolio's total operating expenses would be 1.33% of the average daily net
assets of the Class A shares and 1.58% of the average daily net assets of the
Class B shares. As a result of this reduction, the Management Fee stated above
is lower than the contractual fee stated under "Management of the Fund." The
Adviser reserves the right to terminate any of its fee waivers and/or expense
reimbursements at any time in its sole discretion. For further information on
Fund expenses, see "Management of the Fund."
2
<PAGE>
The purpose of the table above is to assist the investor in understanding
the various expenses that an investor in the Portfolio will bear directly or
indirectly. The Class A expenses and fees for the Portfolio based on actual
figures for the period ended December 31, 1995. The Class B expenses and fees
for the Portfolio are based on estimates, assuming that the average daily net
assets of the Class B shares of the Portfolio will be $50,000,000. "Other
Expenses" include Board of Directors' fees and expenses, amortization of
organizational costs, filing fees, professional fees and costs for shareholder
reports. Due to the continuous nature of Rule 12b-1 fees, long term Class B
shareholders may pay more than the equivalent of the maximum front-end sales
charges otherwise permitted by the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. ("NASD").
The following example illustrates the expenses that you would pay on a
$1,000 investment assuming (1) a 5% annual rate of return and (2) redemption at
the end of each time period. As noted in the table above, the Portfolio charges
no redemption fees of any kind. The example is based on total operating expenses
of the Portfolio after fee waivers.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
U.S. Real Estate Portfolio
Class A.......................................................... $ 10 $ 32 $ 55 $ 122
Class B.......................................................... $ 13 $ 40 $ 69 $ 151
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
The Fund intends to comply with all state laws that restrict investment
company expenses. Currently, the most restrictive state law requires that the
aggregate annual expenses of an investment company shall not exceed two and
one-half percent (2 1/2%) of the first $30 million of average net assets, two
percent (2%) of the next $70 million of average net assets, and one and one-half
percent (1 1/2%) of the remaining net assets of such investment company.
The Adviser has agreed to a reduction in the amounts payable to it, and to
reimburse the Portfolio, if necessary, if in any fiscal year the sum of the
Portfolio's expenses exceeds the limit set by applicable state law.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following table provides financial highlights for the Class A shares of
the Portfolio for the period presented. The audited financial highlights for the
Class A shares for the period ended December 31, 1995 are part of the Fund's
financial statements which appear in the Fund's December 31, 1995 Annual Report
to Shareholders and which is included in the Fund's Statement of Additional
Information. The Portfolio's financial highlights for each of the periods
presented have been audited by Price Waterhouse, LLP, whose unqualified report
thereon is also included in the Statement of Additional Information. Additional
performance information for the Class A shares is included in the Annual Report.
The Annual Report and the financial statements therein, along with the Statement
of Additional Information, are available at no cost from the Fund at the address
and telephone number noted on the cover page of this Prospectus. Financial
highlights are not available for the new Class B shares since they were not
offered as of December 31, 1995. The following information should be read in
conjunction with the financial statements and notes thereto.
4
<PAGE>
U.S. REAL ESTATE PORTFOLIO
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 24,
1995* TO
DECEMBER 31,
1995
-------------
<S> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD............................ $ 10.00
-------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1)........ 0.26
Net Realized and Unrealized Gain
on Investments.................. 1.84
-------------
Total from Investment
Operations...................... 2.10
-------------
DISTRIBUTIONS
Net Investment Income............ (0.24)
Net Realized Gain................ (0.44)
-------------
Total Distribution............. (0.68)
-------------
NET ASSET VALUE, END OF PERIOD..... $ 11.42
-------------
-------------
TOTAL RETURN....................... 21.07%
-------------
-------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands)..................... $ 69,509
Ratio of Expenses to Average Net
Assets (1)(2)................... 1.00%**
Ratio of Net Investment Income to
Average Net Assets (1)(2)....... 4.04%**
Portfolio Turnover Rate.......... 158%
</TABLE>
- ------------------------------
<TABLE>
<S> <C> <C>
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net investment income........ $ 0.02
Ratios before expense limitation:
Expenses to Average Net Assets.................... 1.33%**
Net Investment Income to Average Net Assets....... 3.71%**
</TABLE>
(2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled
to receive a management fee calculated at an annual rate of 0.80% of the
average daily net assets of the Portfolio. The Adviser has agreed to waive a
portion of this fee and/or reimburse expenses of the Portfolio to the extent
that the total operating expenses of the Portfolio exceed 1.00% of the
average daily net assets of the Class A shares and 1.25% of the average
daily net assets of the Class B shares. In the period ended December 31,
1995, the Adviser waived management fees and/or reimbursed expenses
totalling $129,000, for the Portfolio.
* Commencement of Operations.
** Annualized.
5
<PAGE>
PROSPECTUS SUMMARY
THE FUND
The Fund consists of twenty-eight portfolios, offering institutional
investors and high net worth individual investors a broad range of investment
choices coupled with the advantages of a no-load mutual fund with Morgan Stanley
and its affiliates providing customized services as Adviser, Administrator and
Distributor. Each portfolio offers Class A shares and, except the International
Small Cap, Money Market and Municipal Money Market Portfolios, also offers Class
B shares. Each portfolio has its own investment objective and policies designed
to meet specific goals. The investment objective of the U.S. Real Estate
Portfolio is as follows:
-The U.S. REAL ESTATE PORTFOLIO seeks to provide above-average current
income and long-term capital appreciation by investing primarily in equity
securities of companies in the U.S. real estate industry, including real
estate investment trusts.
The other portfolios of the Fund are described in other prospectuses which
may be obtained from the Fund at the address and phone number noted on the cover
page of this Prospectus. The objectives of these other portfolios are listed
below:
GLOBAL AND INTERNATIONAL EQUITY:
-The ACTIVE COUNTRY ALLOCATION PORTFOLIO seeks long-term capital
appreciation by investing in accordance with country weightings determined
by the Adviser in equity securities of non-U.S. issuers which, in the
aggregate, replicate broad country indices.
-The ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Asian issuers.
-The CHINA GROWTH PORTFOLIO seeks to provide long-term capital appreciation
by investing primarily in the equity securities of issuers in The People's
Republic of China, Hong Kong and Taiwan.
-The EMERGING MARKETS PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of emerging country issuers.
-The EUROPEAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of European issuers.
-The GLOBAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of issuers throughout the world,
including U.S. issuers.
-The GOLD PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of foreign and domestic issuers engaged in
gold-related activities.
-The INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers.
-The INTERNATIONAL MAGNUM PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers in accordance
with EAFE country (as defined in "Investment Objective and Policies" below)
weightings determined by the Adviser.
-The INTERNATIONAL SMALL CAP PORTFOLIO seeks long-term capital appreciation
by investing primarily in equity securities of non-U.S. issuers with equity
market capitalizations of less than $1 billion.
-The JAPANESE EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Japanese issuers.
6
<PAGE>
-The LATIN AMERICAN PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Latin American issuers and debt
securities issued or guaranteed by Latin American governments or
governmental entities.
U.S. EQUITY:
-The AGGRESSIVE EQUITY PORTFOLIO seeks capital appreciation by investing
primarily in corporate equity and equity-linked securities.
-The EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation by
investing primarily in growth-oriented equity securities of medium and
large capitalization companies.
-The EMERGING GROWTH PORTFOLIO seeks long-term capital appreciation by
investing primarily in growth-oriented equity securities of small- to
medium-sized corporations.
-The MICROCAP PORTFOLIO seeks long-term capital appreciation by investing
primarily in growth-oriented equity securities of small corporations.
-The SMALL CAP VALUE EQUITY PORTFOLIO seeks high long-term total return by
investing in undervalued equity securities of small- to medium-sized
companies.
-The VALUE EQUITY PORTFOLIO seeks high total return by investing in equity
securities which the Adviser believes to be undervalued relative to the
stock market in general at the time of purchase.
EQUITY AND FIXED INCOME:
-The BALANCED PORTFOLIO seeks high total return while preserving capital by
investing in a combination of undervalued equity securities and fixed
income securities.
FIXED INCOME:
-The EMERGING MARKETS DEBT PORTFOLIO seeks high total return by investing
primarily in debt securities of government, government-related and
corporate issuers located in emerging countries.
-The FIXED INCOME PORTFOLIO seeks to produce a high total return consistent
with the preservation of capital by investing in a diversified portfolio of
fixed income securities.
-The GLOBAL FIXED INCOME PORTFOLIO seeks to produce an attractive real rate
of return while preserving capital by investing in fixed income securities
of issuers throughout the world, including United States issuers.
-The HIGH YIELD PORTFOLIO seeks to maximize total return by investing in a
diversified portfolio of high yield fixed income securities that offer a
yield above that generally available on debt securities in the three
highest rating categories of the recognized rating services.
-The MORTGAGE-BACKED SECURITIES PORTFOLIO seeks to produce as high a level
of current income as is consistent with the preservation of capital by
investing primarily in a variety of investment-grade mortgage-backed
securities.
-The MUNICIPAL BOND PORTFOLIO seeks to produce a high level of current
income consistent with preservation of principal through investment
primarily in municipal obligations, the interest on which is exempt from
federal income tax.
7
<PAGE>
MONEY MARKET:
-The MONEY MARKET PORTFOLIO seeks to maximize current income and preserve
capital while maintaining high levels of liquidity through investing in
high quality money market instruments with remaining maturities of one year
or less.
-The MUNICIPAL MONEY MARKET PORTFOLIO seeks to maximize current tax-exempt
income and preserve capital while maintaining high levels of liquidity
through investing in high quality money market instruments with remaining
maturities of one year or less which are exempt from federal income tax.
INVESTMENT MANAGEMENT
Morgan Stanley Asset Management Inc., a wholly owned subsidiary of Morgan
Stanley Group Inc., which at December 31, 1995, together with its affiliated
asset management companies, had approximately $57.4 billion in assets under
management as an investment manager or as a fiduciary adviser, acts as
investment adviser to the Fund and each of its portfolios. See "Management of
the Fund -- Investment Adviser" and "Management of the Fund -- Administrator."
HOW TO INVEST
Class A shares of the Portfolio are offered directly to investors at net
asset value with no sales commission or 12b-1 charges. Class B shares of the
Portfolio are offered at net asset value with no sales commission, but with a
12b-1 fee, which is accrued daily and paid quarterly, equal to 0.25% of the
Class B shares' average daily net assets on an annualized basis. Share purchases
may be made by sending investments directly to the Fund or through the
Distributor. Shares in a Portfolio account opened prior to January 2, 1996
(each, a "Pre-1996 Account") were designated Class A shares on January 2, 1996.
For a Portfolio account opened on or after January 2, 1996 (a "New Account"),
the minimum initial investment is $500,000 for Class A shares and $100,000 for
Class B shares. Certain exceptions to the foregoing minimums apply to (1) shares
in a Pre-1996 Account with a value of $100,000 or more on March 1, 1996 (a
"Grandfathered Class A Account"); (2) Portfolio accounts held by officers of the
Adviser and its affiliates; and (3) certain advisory or asset allocation
accounts, such as Total Funds Management accounts, managed by Morgan Stanley or
its affiliates, including the Adviser ("Managed Accounts"). The Adviser reserves
the right in its sole discretion to determine which of such advisory or asset
allocation accounts shall be Managed Accounts. For information regarding Managed
Accounts please contact your Morgan Stanley account representative or the Fund
at the telephone number provided on the cover of this Prospectus. Shares in a
Pre-1996 Account with a value of less than $100,000 on March 1, 1996 (a
"Grandfathered Class B Account") converted to Class B shares on March 1, 1996.
The minimum investment levels may be waived at the discretion of the Adviser for
(i) certain employees and customers of Morgan Stanley or its affiliates and
certain trust departments, brokers, dealers, agents, financial planners,
financial services firms, or investment advisers that have entered into an
agreement with Morgan Stanley or its affiliates; and (ii) retirement and
deferred compensation plans and trusts used to fund such plans, including, but
not limited to, those defined in Section 401(a), 403(b) or 457 of the Internal
Revenue Code of 1986, as amended, and "rabbi trusts". See "Purchase of Shares --
Minimum Investment and Account Sizes; Conversion from Class A to Class B
Shares."
The minimum subsequent investment for a Portfolio account is $1,000 (except
for automatic reinvestment of dividends and capital gains distributions for
which there is no minimum). Such subsequent investments will be applied to
purchase additional shares in the same class held by a shareholder in a
Portfolio account. See "Purchase of Shares -- Additional Investments."
8
<PAGE>
HOW TO REDEEM
Class A shares or Class B shares of the Portfolio may be redeemed at any
time, without cost, at the net asset value per share of shares of the applicable
class next determined after receipt of the redemption request. The redemption
price may be more or less than the purchase price. Certain redemptions may cause
involuntary redemption or automatic conversion. Class A or Class B shares held
in New Accounts are subject to involuntary redemption if shareholder
redemption(s) of such shares reduces the value of such account to less than
$100,000 for any continuous 60-day period. Involuntary redemption does not apply
to Managed Accounts, Grandfathered Class A Accounts and Grandfathered Class B
Accounts, regardless of the value of such accounts. Class A shares in a New
Account will convert to Class B shares if shareholder redemption(s) of such
shares reduces the value of such account to less than $500,000 for any
continuous 60-day period. Class B shares in a New Account will convert to Class
A shares if shareholder purchases of additional Class B shares or market
activity cause the value of the Class B shares in the New Account to increase to
$500,000 or more. See "Purchase of Shares -- Minimum Account Sizes and
Involuntary Redemption of Shares" and "Redemption of Shares."
RISK FACTORS
The investment policies of the Portfolio entail certain risks and
considerations of which an investor should be aware. Because the Portfolio
invests primarily in the securities of companies principally engaged in the real
estate industry, its investments may be subject to the risks associated with the
direct ownership of real estate. The Portfolio's share price and investment
return fluctuate, and a shareholder's investment when redeemed may be worth more
or less than his original cost. Because it is expected that the Portfolio will
invest a substantial portion of its assets in real estate investment trusts
("REITs"), the Portfolio may also be subject to certain risks associated with
the direct investments of REITs. Because the Portfolio is a non-diversified
portfolio, the Portfolio will invest a greater proportion of its assets in the
securities of a smaller number of issuers and, as a result, will be subject to a
greater risk with respect to its portfolio securities. See "Investment Objective
and Policies -- Risk Factors."
9
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Portfolio is described below, together with
the policies the Fund employs in its efforts to achieve this objective. The
Portfolio's investment objective is a fundamental policy which may not be
changed without the approval of a majority of the Portfolio's outstanding voting
securities. There is no assurance that the Portfolio will attain its objectives.
The investment policies described below are not fundamental policies and may be
changed without shareholder approval.
The investment objective of the Portfolio is to provide above average
current income and long-term capital appreciation by investing primarily in
equity securities of companies in the U.S. real estate industry, including real
estate investment trusts ("REITs"). Equity securities include common stocks,
shares or units of beneficial interest of REITs, limited partnership interests
in master limited partnerships, rights or warrants to purchase common stocks,
securities convertible into common stocks, and preferred stock.
Under normal circumstances, at least 65% of the Portfolio's total assets
will be invested in income producing equity securities of companies principally
engaged in the U.S. real estate industry. For purposes of the Portfolio's
investment policies, a company is "principally engaged" in the real estate
industry if (i) it derives at least 50% of its revenues or profits from the
ownership, construction, management, financing or sale of residential,
commercial or industrial real estate or (ii) it has at least 50% of the fair
market value of its assets invested in residential, commercial or industrial
real estate. Companies in the real estate industry may include among others:
REITs, master limited partnerships that invest in interests in real estate, real
estate operating companies, and companies with substantial real estate holdings,
such as hotel companies, residential builders and land-rich companies. The
Portfolio seeks to invest in equity securities of companies that provide a
dividend yield that exceeds the composite dividend yield of securities
comprising the Standard & Poor's Stock Price Index ("S&P 500").
A substantial portion of the Portfolio's total assets will be invested in
securities of REITs. REITs pool investors' funds for investment primarily in
income producing real estate or real estate related loans or interests. A REIT
is not taxed on income distributed to its shareholders or unitholders if it
complies with regulatory requirements relating to its organization, ownership,
assets and income, and with a regulatory requirement that it distribute to its
shareholders or unitholders at least 95% of its taxable income for each taxable
year. Generally, REITs can be classified as Equity REITs, Mortgage REITs or
Hybrid REITs. Equity REITs invest the majority of their assets directly in real
property and derive their income primarily from rents and capital gains from
appreciation realized through property sales. Equity REITs are further
categorized according to the types of real estate securities they own, e.g.,
apartment properties, retail shopping centers, office and industrial properties,
hotels, health-care facilities, manufactured housing and mixed-property types.
Mortgage REITs invest the majority of their assets in real estate mortgages and
derive their income primarily from interest payments. Hybrid REITs combine the
characteristics of both Equity and Mortgage REITs. The Portfolio will invest
primarily in Equity REITs. A shareholder in the Portfolio should realize that by
investing in REITs indirectly through the Portfolio, he will bear not only his
proportionate share of the expenses of the Portfolio, but also indirectly, the
management expenses of underlying REITs.
Under normal circumstances, the Portfolio may invest up to 35% of its total
assets in debt securities issued or guaranteed by real estate companies or
secured by real estate assets and rated, at time of purchase, in one of the four
highest rating categories by a nationally recognized statistical rating
organization ("NRSRO") or
10
<PAGE>
determined by the Adviser to be of comparable quality at the time of purchase,
high quality money market instruments, such as notes, certificates of deposit or
bankers' acceptances issued by domestic or foreign insures, or high-grade debt
securities, consisting of corporate debt securities and United States Government
securities. Securities rated in the lowest category of investment grade
securities have speculative characteristics. Investment grade securities are
securities that are rated in one of the four highest rating categories by an
NRSRO.
Any remaining assets not invested as described above may be invested in
certain securities or obligations, including derivative securities, as set forth
in "Additional Investment Information" below. The Portfolio may concentrate in
the U.S. real estate industry, but may not invest more than 25% of its total
assets in securities of companies in any one other industry (for these purposes
the U.S. Government and its agencies and instrumentalities are not considered an
industry).
RISK FACTORS
The investment policies of the Portfolio entail certain risks and
considerations of which an investor should be aware. Because the Portfolio
invests primarily in the securities of companies principally engaged in the real
estate industry, its investments may be subject to the risks associated with the
direct ownership of real estate. These risks include: the cyclical nature of
real estate values, risks related to general and local economic conditions,
overbuilding and increased competition, increases in property taxes and
operating expenses, demographic trends and variations in rental income, changes
in zoning laws, casualty or condemnation losses, environmental risks, regulatory
limitations on rents, changes in neighborhood values, related party risks,
changes in the appeal of properties to tenants, increases in interest rates and
other real estate capital market influences. Generally, increases in interest
rates will increase the costs of obtaining financing, which could directly and
indirectly decrease the value of the Portfolio's investments. The Portfolio's
share price and investment return fluctuate, and a shareholder's investment when
redeemed may be worth more or less than his original cost.
Because it is expected that the Portfolio will invest a substantial portion
of its assets in REITs, the Portfolio will also be subject to certain risks
associated with the direct investments of REITs. REITs may be affected by
changes in the value of their underlying properties and by defaults by borrowers
or tenants. Mortgage REITs may be affected by the quality of the credit
extended. Furthermore, REITs are dependent on specialized management skills.
Some REITs may have limited diversification and may be subject to risks inherent
in investments in a limited number of properties, in a narrow geographic area,
or in a single property type. REITs depend generally on their ability to
generate cash flow to make distributions to shareholders or unitholders, and may
be subject to defaults by borrowers and to self-liquidations. In addition, the
performance of a REIT may be affected by its failure to qualify for tax-free
pass-through of income under the Internal Revenue Code of 1986, as amended (the
"Code"), or its failure to maintain exemption from registration under the
Investment Company Act of 1940, as amended (the "1940 Act"). Changes in
prevailing interest rates may inversely affect the value of the debt securities
in which the Portfolio will invest. Changes in the value of portfolio securities
will not necessarily affect cash income derived from these securities but will
affect a Portfolio's net asset value.
Because the Portfolio is a non-diversified portfolio, the Portfolio is not
limited by the 1940 Act in the proportion of its assets that may be invested in
the obligations of a single issuer. Thus, the Portfolio may invest a greater
proportion of its assets in the securities of a smaller number of issuers and,
as a result, will be subject to a greater risk with respect to its portfolio
securities. Any economic, political, or regulatory developments affecting
11
<PAGE>
the value of the securities the Portfolio holds could have a greater impact on
the total value of the Portfolio's holdings than would be the case if the
Portfolio's securities were diversified among more issuers. The Portfolio,
however, intends to comply with the diversification requirements imposed by the
Code for qualification as a regulated investment company. See "Taxes" and
"Investment Limitations."
ADDITIONAL INVESTMENT INFORMATION
LOANS OF PORTFOLIO SECURITIES. The Portfolio may lend their securities to
brokers, dealers, domestic and foreign banks or other financial institutions for
the purpose of increasing its net investment income. These loans must be secured
continuously by cash or equivalent collateral, or by a letter of credit at least
equal to the market value of the securities loaned plus accrued interest or
income. There may be a risk of delay in recovery of the securities or even loss
of rights in the collateral should the borrower of the securities fail
financially. A Portfolio will not enter into securities loan transactions
exceeding, in the aggregate, 33 1/3% of the market value of its total assets.
For more detailed information about securities lending, see "Investment
Objectives and Policies" in the Statement of Additional Information.
MONEY MARKET INSTRUMENTS. The Portfolio is permitted to invest in money
market instruments, although the Portfolio intends to stay invested in
securities satisfying its primary investment objective to the extent practical.
The Portfolio may make money market investments pending other investment or
settlement for liquidity, or in adverse market conditions. The money market
investments permitted for the Portfolio include obligations of the United States
Government and its agencies and instrumentalities, other debt securities,
commercial paper including bank obligations, certificates of deposit, and
repurchase agreements. For more detailed information about these money market
investments, see "Description of Securities and Ratings" in the Statement of
Additional Information.
NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED
SECURITIES. The Portfolio may invest in securities that are neither listed on a
stock exchange nor traded over-the-counter, including privately placed
securities. Such unlisted equity securities may involve a higher degree of
business and financial risk that can result in substantial losses. As a result
of the absence of a public trading market for these securities, they may be less
liquid than publicly traded securities. Although these securities may be resold
in privately negotiated transactions, the prices realized from these sales could
be less than those originally paid by the Portfolio or less than what may be
considered the fair value of such securities. Furthermore, companies whose
securities are not publicly traded may not be subject to the disclosure and
other investor protection requirements which might be applicable if their
securities were publicly traded. If such securities are required to be
registered under the securities laws of one or more jurisdictions before being
resold, the Portfolio may be required to bear the expenses of registration. The
Portfolio may not invest more than 15% of its net assets in illiquid securities,
including securities for which there is not readily available secondary market
nor more than 10% of its total assets in securities that are restricted from
sale to the public without registration ("Restricted Securities") under the
Securities Act of 1933, as amended (the "1933 Act"). Nevertheless, subject to
the foregoing limit on illiquid securities, the Portfolio may invest up to 15%
of its total assets in Restricted Securities that can be offered and sold to
qualified institutional buyers under Rule 144A under that Act ("144A
Securities"). The Board of Directors has adopted guidelines and delegated to the
Adviser, subject to the supervision of the Board of Directors, the daily
function of determining and monitoring the liquidity of 144A Securities. 144A
Securities may become illiquid if qualified institutional buyers are not
interested in acquiring the securities.
12
<PAGE>
REPURCHASE AGREEMENTS. The Portfolio may enter into repurchase agreements
with brokers, dealers or banks that meet the credit guidelines established by
the Fund's Board of Directors. In a repurchase agreement, the Portfolio buys a
security from a seller that has agreed to repurchase it at a mutually agreed
upon date and price, reflecting the interest rate effective for the term of the
agreement. The term of these agreements is usually from overnight to one week,
and never exceeds one year. Repurchase agreements may be viewed as a fully
collateralized loan of money by the Portfolio to the seller. The Portfolio
always receives securities, with a market value at least equal to the purchase
price (including accrued interest) as collateral and this value is maintained
during the term of the agreement. If the seller defaults and the collateral
value declines, the Portfolio might incur a loss. If bankruptcy proceedings are
commenced with respect to the seller, the Portfolio's realization upon the
collateral may be delayed or limited. The aggregate of certain repurchase
agreements and certain other investments is limited as set forth under
"Investment Limitations."
STOCK OPTIONS, FUTURES CONTRACTS AND OPTIONS IN FUTURES CONTRACTS. The
Portfolio may write (i.e., sell) covered call options on portfolio securities.
The Portfolio may write covered put options on portfolio securities. By selling
a covered call option, the Portfolio would become obligated during the term of
the option to deliver the securities underlying the option should the option
holder choose to exercise the option before the option's termination date. In
return for the call it has written, the Portfolio will receive from the
purchaser (or option holder) a premium which is the price of the option, less a
commission charged by a broker. The Portfolio will keep the premium regardless
of whether the option is exercised. By selling a covered put option, the
Portfolio incurs an obligation to buy the security underlying the option from
the purchaser of the put at the option's exercise price at any time during the
option period, at the purchaser's election (certain options written by the
Portfolio will be exercisable by the purchaser only on a specific date). A call
option is "covered" if the Portfolio owns the security underlying the option it
has written or has an absolute or immediate right to acquire the security by
holding a call option on such security, or maintains a sufficient amount of
cash, cash equivalents or liquid securities to purchase the underlying security.
Generally, a put option is "covered" if the Fund maintains cash, U.S. Government
securities or other high grade debt obligations equal to the exercise price of
the option, or if the Fund holds a put option on the same underlying security
with a similar or higher exercise price.
When the Portfolio writes covered call options, it augments its income by
the premiums received and is thereby hedged to the extent of that amount against
a decline in the price of the underlying securities. The premiums received will
offset a portion of the potential loss incurred by the Portfolio if the
securities underlying the options are ultimately sold by the Portfolio at a
loss. However, during the option period, the Portfolio has, in return for the
premium on the option, given up the opportunity for capital appreciation above
the exercise price should the market price of the underlying security increase,
but has retained the risk of loss should the price of the underlying security
decline.
The Portfolio will write put options to receive the premiums paid by
purchasers (when the Adviser wishes to purchase the security underlying the
option at a price lower than its current market price, in which case the
Portfolio will write the covered put at an exercise price reflecting the lower
purchase price sought) and to close out a long put option position.
The Portfolio may also purchase put options on its portfolio securities or
call options. When the Portfolio purchases a call option it acquires the right
to buy a designated security at a designated price (the "exercise price"), and
when the Portfolio purchases a put option it acquires the right to sell a
designated security at the exercise price, in each case on or before a specified
date (the "termination date"), which is usually not more than
13
<PAGE>
nine months from the date the option is issued. The Portfolio may purchase call
options to close out a covered call position or to protect against an increase
in the price of a security it anticipates purchasing. The Portfolio may purchase
put options on securities which it holds in its portfolio to protect itself
against decline in the value of the security. If the value of the underlying
security were to fall below the exercise price of the put purchased in an amount
greater than the premium paid for the option, the Portfolio would incur no
additional loss. The Portfolio may also purchase put options to close out
written put positions in a manner similar to call option closing purchase
transactions. There are no other limits on the Portfolio's ability to purchase
call and put options.
The Portfolio may enter into futures contracts and options on futures
contracts to remain fully invested and to reduce transaction costs. The
Portfolio may also enter into futures transactions as a hedge against
fluctuations in the price of a security it holds or intends to acquire, but not
for speculation or for achieving leverage. The Portfolio may enter into futures
contracts and options on futures contracts provided that not more than 5% of the
Portfolio's total assets at the time of entering into the contract or option is
required as deposit to secure obligations under such contracts and options, and
provided that not more than 20% of the Portfolio's total assets in the aggregate
is invested in futures contracts and options on futures contracts.
The Portfolio may purchase and write call and put options on futures
contracts that are traded on any international exchange, traded over-the-counter
or which are synthetic options or futures or equity swaps, and may enter into
closing transactions with respect to such options to terminate an existing
position. An option on a futures contract gives the purchaser the right (in
return for the premium paid) to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put) at
a specified exercise price at any time during the term of the option. The
Portfolio will purchase and write options on futures contracts for identical
purposes to those set forth above for the purchase of a futures contract
(purchase of a call option or sale of a put option) and the sale of a futures
contract (purchase of a put option or sale of a call option), or to close out a
long or short position in future contracts.
Options, futures and options on futures are derivative securities, in which
the Portfolio may invest for hedging purposes, as well as to remain fully
invested and to reduce transaction costs. Investing for the latter two purposes
may be considered speculative. The primary risks associated with the use of
options, futures and options on futures are (i) imperfect correlation between
the change in market value of the stocks held by the Portfolio and the prices of
futures and options relating to the stocks purchased or sold by the Portfolio;
and (ii) possible lack of a liquid secondary market for an option or a futures
contract and the resulting inability to close a futures position which could
have an adverse impact on the Portfolio's ability to hedge. In the opinion of
the Board of Directors, the risk that the Portfolio will be unable to close out
a futures position or options contract will be minimized by only entering into
futures contracts or options transactions for which there appears to be a liquid
secondary market.
TEMPORARY INVESTMENTS. For temporary defensive purposes, when the Adviser
determines that market conditions warrant, the Portfolio may invest up to 100%
of its assets in money market instruments consisting of securities issued or
guaranteed by the United States Government, its agencies or instrumentalities,
repurchase agreements, certificates of deposit and bankers' acceptances issued
by banks or savings and loan associations having net assets of at least $500
million as of the end of their most recent fiscal year, high-grade commercial
paper rated, at time of purchase, in the top two categories by a national rating
agency or determined to be of
14
<PAGE>
comparable quality by the Adviser at the time of purchase and other long- and
short-term debt instruments which are rated A or higher by Standard & Poor's
Corporation ("S&P") or Moody's Investors Service, Inc. ("Moody's") at the time
of purchase, and may hold a portion of its assets in cash.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Portfolio may purchase
securities on a when-issued or delayed delivery basis. In such transactions,
instruments are bought with payment and delivery taking place in the future in
order to secure what is considered to be an advantageous yield or price at the
time of the transaction. Delivery of and payment for these securities may take
as long as a month or more after the date of the purchase commitment, but will
take place no more than 120 days after the trade date. The Portfolio will
maintain with the Custodian a separate account with a segregated portfolio of
high-grade debt securities or cash in an amount at least equal to these
commitments. The payment obligation and the interest rates that will be received
are each fixed at the time the Portfolio enters into the commitment and no
interest accrues to the Portfolio until settlement. Thus, it is possible that
the market value at the time of settlement could be higher or lower than the
purchase price if the general level of interest rates has changed. It is a
current policy of the Portfolio not to enter into when-issued commitments
exceeding, in the aggregate, 15% of the market value of the Portfolio's total
assets less liabilities other than the obligations created by these commitments.
INVESTMENT LIMITATIONS
As a non-diversified investment company, the Portfolio is not limited by the
1940 Act in the proportion of its total assets that may be invested in the
obligations of a single issuer. Thus, the Portfolio may invest a greater
proportion of its total assets in the securities of a smaller number of issuers
and, as a result, will be subject to greater risk with respect to its portfolio
securities. However, the Portfolio intends to comply with the diversification
requirements imposed by the Internal Revenue Code of 1986, as amended, for
qualification a regulated investment company. See "Investment Limitations" in
the Statement of Additional Information.
The Portfolio operates under certain investment restrictions that are deemed
fundamental limitations and may be changed only with the approval of the holders
of a majority of the Portfolio's outstanding shares. See "Investment
Limitations" in the Statement of Additional Information. In addition, the
Portfolio operates under certain non-fundamental investment limitations, as
described below and in the Statement of Additional Information. The Portfolio
may not: (i) enter into repurchase agreements with more than seven days to
maturity if, as a result, more than 15% of the market value of the Portfolio's
net assets would be invested in such repurchase agreements and other investments
for which market quotations are not readily available or which are otherwise
illiquid; (ii) invest more than 10% of its total assets in Restricted
Securities, except that the Portfolio may invest up to 15% of its total assets
in Restricted Securities that are 144A Securities, subject to the limitation on
illiquid securities described above; (iii) borrow money, except from banks for
extraordinary or emergency purposes, and then only in amounts up to 10% of the
value of the Portfolio's total assets, taken at cost at the time of borrowing;
or purchase securities while borrowings exceed 5% of its total assets; (iv)
mortgage, pledge or hypothecate any assets except in connection with any such
borrowing in amounts up to 10% of the value of the Portfolio's total assets at
the time of borrowing; (v) invest in fixed time deposits with a duration of over
seven calendar days; or (vi) invest in fixed timed deposits with a duration of
from two business days to seven calendar days if more than 10% of the
Portfolio's total assets would be invested in these deposits.
15
<PAGE>
MANAGEMENT OF THE FUND
INVESTMENT ADVISER. Morgan Stanley Asset Management Inc. is the Investment
Adviser and Administrator of the Fund and each of its portfolios. The Adviser
provides investment advice and portfolio management services pursuant to an
Investment Advisory Agreement and, subject to the supervision of the Fund's
Board of Directors, makes the Portfolio's day-to-day investment decisions,
arranges for the execution of portfolio transactions and generally manages the
Portfolio's investments. The Adviser is entitled to receive from the Portfolio
an annual management fee, payable quarterly, equal to the percentage of average
daily net assets set forth in the table below. However, the Adviser has agreed
to a reduction in the fees payable to it and to reimburse the Portfolio, if
necessary, if such fees would cause the total annual operating expenses of the
Portfolio to exceed the respective percentage of average daily net assets set
forth below.
<TABLE>
<CAPTION>
MAXIMUM TOTAL ANNUAL
OPERATING
MANAGEMENT EXPENSES AFTER FEE
FEE WAIVERS
----------- -------------------------
PORTFOLIO CLASS A CLASS B
- ------------------------------ --------- ---------
<S> <C> <C> <C>
U.S. Real Estate Portfolio 0.80% 1.00% 1.25%
</TABLE>
The fee payable by the Portfolio is higher than the management fee paid by
most investment companies, but the Adviser believes the fee is comparable to
those of investment companies with similar investment objectives.
The Adviser, with principal offices at 1221 Avenue of the Americas, New
York, New York 10020, conducts a worldwide portfolio management business,
providing a broad range of portfolio management services to customers in the
United States and abroad. At December 31, 1995, the Adviser, together with its
affiliated asset management companies, managed investments totaling
approximately $57.4 billion, including approximately $41.9 billion under active
management and $15.5 billion as Named Fiduciary or Fiduciary Adviser. See
"Management of the Fund" in the Statement of Additional Information.
PORTFOLIO MANAGER. -- RUSSELL C. PLATT. Mr. Platt joined Morgan Stanley in
1982 and currently is a Principal of the Firm. Russell Platt has primary
responsibility for managing the real estate securities investment business for
Morgan Stanley Asset Management ("MSAM") and serves as a member of the
Investment Committee of The Morgan Stanley Real Estate Fund ("MSREF").
Previously, Mr. Platt served as a Director of MSREF, where he was involved in
capital raising, acquisitions, oversight of investments and investor relations.
MSREF is a privately held limited partnership engaged in the acquisition of real
estate assets, portfolios and real estate operating companies with gross assets
of approximately $3.5 billion as of December 1994. From 1991 to 1993, Mr. Platt
was head of Morgan Stanley's Transaction Development Group, which was
responsible for identifying and structuring real estate investment opportunities
for the Firm and its clients worldwide. As part of these responsibilities, Mr.
Platt directed Morgan Stanley Realty's activities in Latin America and served as
U.S. liaison for Morgan Stanley Realty's Japanese real estate clients. From 1990
to 1991, Mr. Platt was based in Morgan Stanley Realty's London Office, where he
was responsible for European transaction development. Prior to this, he had
extensive transaction responsibilities involving portfolio, retail, office,
hotel and apartment sales and financings. Mr. Platt graduated from Williams
College in 1982 with a B.A. in Economics and received his M.B.A. from Harvard
Business School in 1986. Mr. Platt is a member of the Board of Trustees of The
National Multi
16
<PAGE>
Housing Council and The Wharton Real Estate Center, and a member of The Urban
Land Institute (International Council), the National Association of Real Estate
Investment Trusts and the Pension Real Estate Association.
THEODORE R. BIGMAN. Mr. Bigman joined Morgan Stanley Asset Management in
1995 as a Vice President. Together with Russell Platt, he is responsible for
MSAM's real estate securities research. Prior to joining MSAM, he was a Director
at CS First Boston, where he worked for eight years in the Real Estate Group.
Since 1992, Mr. Bigman established and managed the REIT effort at CS First
Boston, including primary responsibility for $2.5 billion of initial public
offering by real estate investment trusts. Previously, Mr. Bigman had extensive
real estate experience in a wide variety of transactions involving the financing
and sale of both individual assets and portfolios of real estate assets as well
as the acquisition and sale of several real estate companies. Mr. Bigman
graduated from Brandeis University in 1983 with a B.A. in Economics and received
his M.B.A. from Harvard University in 1987. He is a member of the National
Association of Real Estate Investment Trusts and International Council of
Shopping Centers.
ADMINISTRATOR. The Adviser also provides the Fund with administrative
services pursuant to an Administration Agreement. The services provided under
the Administration Agreement are subject to the supervision of the Officers and
the Board of Directors of the Fund and include day-to-day administration of
matters related to the corporate existence of the Fund, maintenance of its
records, preparation of reports, supervision of the Fund's arrangements with its
custodian, and assistance in the preparation of the Fund's registration
statements under Federal and State laws. The Administration Agreement also
provides that the Administrator, through its agents, will provide to the Fund
dividend disbursing and transfer agent services. For its services under the
Administration Agreement, the Fund pays the Adviser a monthly fee which on an
annual basis equals 0.15% of the average daily net assets of the Portfolio.
Under an agreement between the Adviser and The Chase Manhattan Bank, N.A.
("Chase"), Chase provides certain administrative services to the Fund. In a
merger completed on September 1, 1995, Chase succeeded to all of the rights and
obligations under the U.S. Trust Administration Agreement between the Adviser
and the United States Trust Company of New York ("U.S. Trust"), pursuant to
which U.S. Trust had agreed to provide certain administrative services to the
Fund. Pursuant to a delegation clause in the U.S. Trust Administration
Agreement, U.S. Trust delegated its administrative responsibilities to Chase
Global Funds Services Company ("CGFSC"), formerly known as Mutual Funds Service
Company, which after the merger with Chase is a subsidiary of Chase and will
continue to provide certain administrative services to the Fund. The Adviser
supervises and monitors such administrative services provided by CGFSC. The
services provided under the Administration Agreement and the U.S. Trust
Administration Agreement are also subject to the supervision of the Board of
Directors of the Fund. The Board of Directors of the Fund has approved the
provision of services described above pursuant to the Administration Agreement
and the U.S. Trust Administration Agreement, as being in the best interests of
the Fund. CGFSC's business address is 73 Tremont Street, Boston, Massachusetts
02108-3913. For additional information regarding the Administration Agreement or
the U.S. Trust Administration Agreement, see "Management of the Fund" in the
Statement of Additional Information.
DIRECTORS AND OFFICERS. Pursuant to the Fund's Articles of Incorporation,
the Board of Directors decides upon matters of general policy and reviews the
actions of the Fund's Adviser, Administrator and Distributor. The Officers of
the Fund conduct and supervise its daily business operations.
17
<PAGE>
DISTRIBUTOR. Morgan Stanley serves as the exclusive Distributor of the
shares of the Fund. Under its Distribution Agreement with the Fund, Morgan
Stanley sells shares of the Portfolio upon the terms and at the current offering
price described in this Prospectus. Morgan Stanley is not obligated to sell any
certain number of shares of the Portfolio.
The Portfolio currently offers only the classes of shares offered by this
Prospectus. The Portfolio may in the future offer one or more classes of shares
with features, distribution expenses or other expenses that are different from
those of the classes currently offered.
The Fund has adopted a Plan of Distribution with respect to the Class B
shares pursuant to Rule 12b-1 under the 1940 Act (the "Plan"). Under the Plan,
the Distributor is entitled to receive from the Portfolio a distribution fee,
which is accrued daily and paid quarterly, of 0.25% of the Class B shares'
average daily net assets on an annualized basis. The Distributor expects to
reallocate most of its fee to its investment representatives. The Distributor
may, in its discretion, voluntarily waive from time to time all or any portion
of its distribution fee and each of the Distributor and the Adviser is free to
make additional payments out of its own assets to promote the sale of Fund
shares, including payments that compensate financial institutions for
distribution services or shareholder services.
The Plan is designed to compensate the Distributor for its services, not to
reimburse the Distributor for its expenses, and the Distributor may retain any
portion of the fee that it does not expend in fulfillment of its obligations to
the Fund.
EXPENSES. The Portfolio is responsible for payment of certain other fees
and expenses (including legal fees, accountants' fees, custodial fees, and
printing and mailing costs) specified in the Administration and Distribution
Agreements.
PURCHASE OF SHARES
Class A and Class B shares of the Portfolio may be purchased, without sales
commission, at the net asset value per share next determined after receipt of
the purchase order by the Portfolio. See "Valuation of Shares."
MINIMUM INVESTMENT AND ACCOUNT SIZES; CONVERSION FROM CLASS A TO CLASS B SHARES
For an account for the Portfolio opened on or after January 2, 1996 (a "New
Account"), the minimum initial investment and minimum account size are $500,000
for Class A shares and $100,000 for Class B shares. Managed Accounts may
purchase Class A shares without being subject to any minimum initial investment
or minimum account size requirements for a Portfolio account. Officers of the
Adviser and its affiliates are subject to the minimums for a Portfolio account,
except they may purchase Class B shares subject to a minimum initial investment
and minimum account size of $5,000 for a Portfolio account.
If the value of a New Account containing Class A shares falls below $500,000
(but remains at or above $100,000) because of shareholder redemption(s), the
Fund will notify the shareholder, and if the account value remains below
$500,000 (but remains at or above $100,000) for a continuous 60-day period, the
Class A shares in such account will convert to Class B shares and will be
subject to the distribution fee and other features applicable to the Class B
shares. The Fund, however, will not convert Class A shares to Class B shares
based solely upon changes in the market that reduce the net asset value of
shares. Under current tax law, conversions between share classes are not a
taxable event to the shareholder.
18
<PAGE>
Shares in a Portfolio account opened prior to January 2, 1996 (a "Pre-1996
Account") were designated Class A shares on January 2, 1996. Shares in a
Pre-1996 Account with a value of $100,000 or more on March 1, 1996 (a
"Grandfathered Class A Account") remain Class A shares regardless of account
size thereafter. Except for shares in a Managed Account, shares in a Pre-1996
Account with a value of less than $100,000 on March 1, 1996 (a "Grandfathered
Class B account") convert to Class B shares on March 1, 1996. Grandfathered
Class A Accounts and Managed Accounts are not subject to conversion from Class A
shares to Class B shares.
Investors may also invest in the Fund by purchasing shares through a trust
department, broker, dealer, agent, financial planner, financial services firm or
investment adviser. An investor may be charged an additional service or
transaction fee by that institution. The minimum investment levels may be waived
at the discretion of the Adviser for (i) certain employees and customers of
Morgan Stanley or its affiliates and certain trust departments, brokers,
dealers, agents, financial planners, financial services firms, or investment
advisers that have entered into an agreement with Morgan Stanley or its
affiliates; and (ii) retirement and deferred compensation plans and trusts used
to fund such plans, including, but not limited to, those defined in Section
401(a), 403(b) or 457 of the Internal Revenue Code of 1986, as amended, and
"rabbi trusts". The Fund reserves the right to modify or terminate the
conversion features of the shares as stated above at any time upon 60-days'
notice to shareholders.
MINIMUM ACCOUNT SIZES AND INVOLUNTARY REDEMPTION OF SHARES
If the value of a New Account falls below $100,000 because of shareholder
redemption(s), the Fund will notify the shareholder, and if the account value
remains below $100,000 for a continuous 60-day period, the shares in such
account are subject to redemption by the Fund and, if redeemed, the net asset
value of such shares will be promptly paid to the shareholder. The Fund,
however, will not redeem shares based solely upon changes in the market that
reduce the net asset value of shares.
For purposes of redemptions by the Fund, the foregoing minimum account size
requirements do not apply to New Accounts containing Class B shares held by
officers of the Adviser or its affiliates. However, if the value of such account
held by an officer of the Adviser or its affiliates falls below $5,000 because
of shareholder redemption(s), the Fund will notify the shareholder, and if the
account value remains below $5,000 for a continuous 60-day period, the shares in
such account are subject to redemption by the Fund and, if redeemed, the net
asset value of such shares will be promptly paid to the shareholder.
Grandfathered Class A Accounts, Grandfathered Class B Accounts and Managed
Accounts are not subject to involuntary redemption.
The Fund reserves the right to modify or terminate the involuntary
redemption features of the shares as stated above at any time upon 60-days'
notice to shareholders.
CONVERSION FROM CLASS B TO CLASS A SHARES
If the value of Class B shares in a Portfolio account increases, whether due
to shareholder share purchases or market activity, to $500,000 or more, the
Class B shares will convert to Class A shares. Under current tax law, such
conversion is not a taxable event to the shareholder. Class A shares converted
from Class B shares are subject to the same minimum account size requirements
that are applicable to New Accounts containing Class A shares, as stated above.
The Fund reserves the right to modify or terminate this conversion feature at
any time upon 60-days' notice to shareholders.
19
<PAGE>
INITIAL PURCHASES DIRECTLY FROM THE FUND
The Fund's determination of an investor's eligibility to purchase shares of
a given class will take precedence over the investor's selection of a class.
Assuming the investor is eligible for the class, the Fund will select the most
favorable class for the investor, if the investor has not done so.
1) BY CHECK. An account may be opened by completing and signing an Account
Registration Form and mailing it, together with a check ($500,000 minimum for
Class A shares of the Portfolio and $100,000 for Class B shares of the
Portfolio, with certain exceptions for Morgan Stanley employees and select
customers) payable to "Morgan Stanley Institutional Fund, Inc. -- U.S. Real
Estate Portfolio", to:
Morgan Stanley Institutional Fund, Inc.
P.O. Box 2798
Boston, Massachusetts 02208-2798
Payment will be accepted only in U.S. dollars, unless prior approval for
payment by other currencies is given by the Fund. The class(es) of shares of
the Portfolio to be purchased should be designated on the Account Registration
Form. For purchases by check, the Fund is ordinarily credited with Federal
Funds within one business day. Thus, your purchase of shares by check is
ordinarily credited to your account at the net asset value per share of the
Portfolio determined on the next business day after receipt.
2) BY FEDERAL FUNDS WIRE. Purchases may be made by having your bank wire
Federal Funds to the Fund's bank account. In order to ensure prompt receipt
of your Federal Funds Wire, it is important that you follow these steps:
A. Telephone the Fund (toll free: 1-800-548-7786) and provide us with your
name, address, telephone number, Social Security or Tax Identification
Number, the portfolio(s) selected, the class selected, the amount being
wired, and by which bank. We will then provide you with a Fund account
number. (Investors with existing accounts should also notify the Fund prior
to wiring funds.)
B. Instruct your bank to wire the specified amount to the Fund's Wire
Concentration Bank Account (be sure to have your bank include the name of
the portfolio(s) selected, the class selected, and the account number
assigned to you) as follows:
Chase Manhattan Bank, N.A.
One Manhattan Plaza
New York, NY 10081-1000
ABA #021000021
DDA #910-2-733293
Attn: Morgan Stanley Institutional Fund, Inc.
Ref: (Portfolio name, your account number, your account name)
Please call the Fund at 1-800-548-7786 prior to wiring funds.
C. Complete and sign the Account Registration Form and mail it to the address
shown thereon.
20
<PAGE>
Purchase orders for shares of the Portfolio which are received prior to the
regular close of the NYSE (currently 4:00 p.m. Eastern Time) will be executed
at the price computed on the date of receipt as long as the Transfer Agent
receives payment by check or in Federal Funds prior to the regular close of
the NYSE on such day.
Federal Funds purchase orders will be accepted only on a day on which the Fund
and Chase (the "Custodian Bank") are open for business. Your bank may charge a
service fee for wiring Federal Funds.
3) BY BANK WIRE. The same procedure outlined under "By Federal Funds Wire"
above must be followed in purchasing shares by bank wire. However, money
transferred by bank wire may or may not be converted into Federal Funds the
same day, depending on the time the money is received and the bank handling
the wire. Prior to such conversion, an investor's money will not be invested.
Your bank may charge a service fee for wiring funds.
ADDITIONAL INVESTMENTS
You may add to your account at any time (minimum additional investment
$1,000 except for automatic reinvestment of dividends and capital gains
distributions for which there are no minimums) by purchasing shares at net asset
value by mailing a check to the Fund (payable to "Morgan Stanley Institutional
Fund, Inc. -- U.S. Real Estate Portfolio" at the above address or by wiring
monies to the Custodian Bank as outlined above. It is very important that your
account name, the portfolio name and the class selected be specified in the
letter or wire to assure proper crediting to your account. In order to insure
that your wire orders are invested promptly, you are requested to notify one of
the Fund's representatives (toll free: 1-800-548-7786) prior to the wire date.
Additional investments will be applied to purchase additional shares in the same
class held by a shareholder in a Portfolio account.
OTHER PURCHASE INFORMATION
The purchase price of the Class A and Class B shares of the Portfolio is the
net asset value next determined after the order is received. See "Valuation of
Shares." An order received prior to the close of the New York Stock Exchange
("NYSE"), which is currently 4:00 p.m. Eastern Time, will be executed at the
price computed on the date of receipt; an order received after the close of the
NYSE will be executed at the price computed on the next day the NYSE is open as
long as the Transfer Agent receives payment by check or in Federal Funds prior
to the regular close of the NYSE on such day.
Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends. The net asset value of Class B shares will generally be
lower than the net asset value of Class A shares as a result of the distribution
expense charged to Class B shares. It is expected, however, that the net asset
value per share of the two classes will tend to converge immediately after the
recording of dividends which will differ by approximately the amount of the
distribution expense accrual differential between the classes.
In the interest of economy and convenience, and because of the operating
procedures of the Fund, certificates representing shares of the Portfolio will
not be issued. All shares purchased are confirmed to you and credited to your
account on the Fund's books maintained by the Adviser or its agents. You will
have the same rights and ownership with respect to such shares as if
certificates had been issued.
21
<PAGE>
To ensure that checks are collected by the Fund, withdrawals of investments
made by check are not presently permitted until payment for the purchase has
been received, which may take up to eight business days after the date of
purchase. As a condition of this offering, if a purchase is cancelled due to
nonpayment or because your check does not clear, you will be responsible for any
loss the Fund or its agents incur. If you are already a shareholder, the Fund
may redeem shares from your account(s) to reimburse the Fund or its agents for
any loss. In addition, you may be prohibited or restricted from making future
investments in the Fund.
Investors may also invest in the Fund by purchasing shares through the
Distributor. See "Purchase of Shares" in the Statement of Additional
Information.
EXCESSIVE TRADING
Frequent trades involving either substantial portfolio assets or a
substantial portion of your account or accounts controlled by you can disrupt
management of a portfolio and raise its expenses. Consequently, in the interest
of all the stockholders of the Portfolio and the Portfolio's performance, the
Fund may in its discretion bar a stockholder that engages in excessive trading
of shares of any class of a portfolio from further purchases of shares of the
Fund for an indefinite period. The Fund considers excessive trading to be more
than one purchase and sale involving shares of the same class of a portfolio of
the Fund within any 120-day period. As an example, exchanging shares of
portfolios of the Fund as follows amounts to excessive trading: exchanging Class
A shares of Portfolio A for Class A shares of Portfolio B, then exchanging Class
A shares of Portfolio B for Class A shares of Portfolio C and again exchanging
Class A shares of Portfolio C for Class A shares of Portfolio B within a 120-day
period. Two types of transactions are exempt from these excessive trading
restrictions: (1) trades exclusively between money market portfolios; and (2)
trades done in connection with an asset allocation service, such as TFM
Accounts, managed or advised by MSAM and/or any of its affiliates.
REDEMPTION OF SHARES
You may withdraw all or any portion of the amount in your account by
redeeming shares at any time. Please note that purchases made by check are not
permitted to be redeemed until payment of the purchase price has been collected,
which may take up to eight business days after purchase. The Fund will redeem
Class A shares or Class B shares of the Portfolio at the next determined net
asset value of shares of the applicable class. On days that both the NYSE and
the Custodian Bank are open for business, the net asset value per share of the
Portfolio is determined at the close of trading of the NYSE (currently 4:00 p.m.
Eastern time). Shares of the Portfolio may be redeemed by mail or telephone. No
charge is made for redemption. Any redemption may be more or less than the
purchase price of your shares depending on, among other factors, the market
value of the investment securities held by the Portfolio.
BY MAIL
The Portfolio will redeem its Class A shares or Class B shares at the net
asset value determined on the date the request is received, if the request is
received in "good order" before the regular close of the NYSE. Your request
should be addressed to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798,
Boston, Massachusetts 02208-2798, except that deliveries by overnight courier
should be addressed to Morgan Stanley Institutional Fund, Inc., c/o Chase Global
Funds Services Company, 73 Tremont Street, Boston, Massachusetts 02108-3913.
22
<PAGE>
"Good order" means that the request to redeem shares must include the
following documentation:
(a) A letter of instruction or a stock assignment specifying the number
of shares or dollar amount to be redeemed, signed by all registered owners
of the shares in the exact names in which they are registered;
(b) Any required signature guarantees (see "Further Redemption
Information" below); and
(c) Other supporting legal documents, if required, in the case of
estates, trusts, guardianships, custodianships, corporations, pension and
profit sharing plans and other organizations.
Shareholders who are uncertain of requirements for redemption should consult
with a Morgan Stanley Institutional Fund representative.
BY TELEPHONE
Provided you have previously elected the Telephone Redemption Option on the
Account Registration Form, you can request a redemption of your shares by
calling the Fund and requesting the redemption proceeds be mailed to you or
wired to your bank. Please contact one of Morgan Stanley Institutional Fund's
representatives for further details. In times of drastic market conditions, the
telephone redemption option may be difficult to implement. If you experience
difficulty in making a telephone redemption, your request may be made by mail or
overnight courier and will be implemented at the net asset value next determined
after it is received. Redemption requests sent to the Fund through express mail
must be mailed to the address of the Dividend Disbursing and Transfer Agent
listed under "General Information". The Fund and the Fund's transfer agent (the
"Transfer Agent") will employ reasonable procedures to confirm that the
instructions communicated by telephone are genuine. These procedures include
requiring the investor to provide certain personal identification information at
the time an account is opened and prior to effecting each transaction requested
by telephone. In addition, all telephone transaction requests will be recorded
and investors may be required to provide additional telecopied written
instructions regarding transaction requests. Neither the Fund nor the Transfer
Agent will be responsible for any loss, liability, cost or expense for following
instructions received by telephone that either of them reasonably believes to be
genuine.
To change the commercial bank or account designated to receive redemption
proceeds, a written request must be sent to the Fund at the address above.
Requests to change the bank or account must be signed by each shareholder and
each signature must be guaranteed.
FURTHER REDEMPTION INFORMATION
Normally the Fund will make payment for all shares redeemed within one
business day of receipt of the request, but in no event will payment be made
more than seven days after receipt of a redemption request in good order.
However, payments to investors redeeming shares which were purchased by check
will not be made until payment for the purchase has been collected, which may
take up to eight days after the date of purchase. The Fund may suspend the right
of redemption or postpone the date upon which redemptions are effected at times
when the NYSE is closed, or under any emergency circumstances as determined by
the Securities and Exchange Commission (the "Commission").
If the Board of Directors determines that it would be detrimental to the
best interests of the remaining shareholders of the Portfolio to make payment
wholly or partly in cash, the Fund may pay the redemption proceeds in whole or
in part by a distribution in-kind of securities held by the Portfolio in lieu of
cash in
23
<PAGE>
conformity with applicable rules of the Commission. Distributions-in-kind will
be made in readily marketable securities. Investors may incur brokerage charges
on the sale of portfolio securities so received in payment of redemptions.
To protect your account, the Fund and its agents from fraud, signature
guarantees are required for certain redemptions to verify the identity of the
person who has authorized a redemption from your account. Please contact the
Fund for further information. See "Redemption of Shares" in the Statement of
Additional Information.
SHAREHOLDER SERVICES
EXCHANGE FEATURES
You may exchange shares that you own in the Portfolio for shares of any
other available portfolio of the Fund (other than the International Equity
Portfolio, which is closed to new investors). In exchanging for shares of a
portfolio with more than one class, the class of shares you receive in the
exchange will be determined in the same manner as any other purchase of shares
and will not be based on the class of shares surrendered for the exchange.
Consequently, the same minimum initial investment and minimum account size for
determining the class of shares received in the exchange will apply. See
"Purchase of Shares." Shares of the portfolios may be exchanged by mail or
telephone. The privilege to exchange shares by telephone is automatic and made
available without shareholder election. Before you make an exchange, you should
read the prospectus of the portfolio(s) in which you seek to invest. Because an
exchange transaction is treated as a redemption followed by a purchase, an
exchange would be considered a taxable event for shareholders subject to tax.
The exchange privilege is only available with respect to portfolios that are
registered for sale in a shareholder's state of residence. The exchange
privilege may be modified or terminated by the Fund at any time upon 60-days'
notice to shareholders.
BY MAIL
In order to exchange shares by mail, you should include in the exchange
request the name, class of shares and account number of your current portfolio,
the names of the portfolio(s) and class(es) of shares into which you intend to
exchange shares, and the signatures of all registered account holders. Send the
exchange request to Morgan Stanley Institutional Fund, P.O. Box 2798, Boston,
Massachusetts 02208-2798.
BY TELEPHONE
When exchanging shares by telephone, have ready the name, class of shares
and account number of the current Portfolio, the names of the portfolio(s) and
class(es) of shares into which you intend to exchange shares, your Social
Security number or Tax I.D. number, and your account address. Requests for
telephone exchanges received prior to 4:00 p.m. (Eastern time) are processed at
the close of business that same day based on the net asset value of the class of
the Portfolios involved in the exchange of the shares at the close of business.
Requests received after 4:00 p.m. (Eastern time) are processed the next business
day based on the net asset value determined at the close of business on such
day. For additional information regarding responsibility for the authenticity of
telephoned instructions, see "Redemption of Shares -- By Telephone" above.
TRANSFER OF REGISTRATION
You may transfer the registration of any of your Fund shares to another
person by writing to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798,
Boston, Massachusetts 02208-2798. As in the case of redemptions, the
24
<PAGE>
written request must be received in good order before any transfer can be made.
Transferring the registration of shares may affect the eligibility of your
account for a given class of the Portfolio's shares and may result in
involuntary conversion or redemption of your shares. See "Purchase of Shares"
above.
VALUATION OF SHARES
The net asset value per share of a class of shares of the Portfolio is
determined by dividing the total market value of the Portfolio's investments and
other assets attributable to such class, less any liabilities attributable to
such class, by the total number of outstanding shares of such class of the
Portfolio. Net asset value is calculated separately for each class of the
Portfolio. Net asset value per share is determined as of the close of the NYSE
on each day that the NYSE is open for business. Price information on listed
securities is taken from the exchange where the security is primarily traded.
Securities listed on a U.S. securities exchange for which market quotations are
available are valued at the last quoted sale price on the day the valuation is
made. Securities listed on a foreign exchange are valued at their closing price.
Unlisted securities and listed securities not traded on the valuation date for
which market quotations are not readily available are valued at a price that is
considered to best represent fair value within a range not in excess of the
current asked price nor less than the current bid price. The current bid and
asked prices are determined based on the bid and asked prices quoted on such
valuation date by reputable brokers.
Bonds and other fixed income securities are valued according to the broadest
and most representative market, which will ordinarily be the over-the-counter
market. Net asset value includes interest on fixed income securities, which is
accrued daily. In addition, bonds and other fixed income securities may be
valued on the basis of prices provided by a pricing service when such prices are
believed to reflect the fair market value of such securities. The prices
provided by a pricing service are determined without regard to bid or last sale
prices, but take into account institutional-size trading in similar groups of
securities and any developments related to the specific securities. Securities
not priced in this manner are valued at the most recently quoted sale price, or
when securities exchange valuations are used, at the latest quoted bid price on
the day of valuation. If there is no such reported sale, the latest quoted bid
price will be used. Securities purchased with remaining maturities of 60 days or
less are valued at amortized cost, if it approximates market value. In the event
that amortized cost does not approximate market value, market prices as
determined above will be used.
The value of other assets and securities for which no quotations are readily
available (including restricted and unlisted foreign securities) and those
securities for which it is inappropriate to determine prices in accordance with
the above-stated procedures are determined in good faith at fair value using
methods determined by the Board of Directors. For purposes of calculating net
asset value per share, all assets and liabilities initially expressed in foreign
currencies will be translated into U.S. dollars at the bid price of such
currencies against the U.S. dollar last quoted by any major bank.
Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends for the class. Dividends will differ by approximately the
amount of the distribution expense accrual differential among the classes. The
net asset value of Class B shares will generally be lower than the net asset
value of the Class A shares as a result of the distribution expense charged to
Class B shares.
25
<PAGE>
PERFORMANCE INFORMATION
The Fund may from time to time advertise total return for each class of the
Portfolio. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT INTENDED
TO INDICATE FUTURE PERFORMANCE. The "total return" shows what an investment in a
class of the Portfolio would have earned over a specified period of time (such
as one, five or ten years), assuming that all distributions and dividends by the
Portfolio were reinvested in the same class on the reinvestment dates during the
period. Total return does not take into account any federal or state income
taxes that may be payable on dividends and distributions or upon redemption. The
Fund may also include comparative performance information in advertising or
marketing the Portfolio's shares, including data from Lipper Analytical
Services, Inc., other industry publications, business periodicals, rating
services and market indices.
The performance figures for Class B shares will generally be lower than
those for Class A shares because of the distribution fee charged to Class B
shares.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All income dividends and capital gains distributions for a class of shares
will be automatically reinvested in additional shares of such class at net asset
value, except that, upon written notice to the Fund or by checking off the
appropriate box in the Distribution Option Section on the Account Registration
Form, a shareholder may elect to receive income dividends and capital gains
distributions in cash.
The Portfolio expects to distribute substantially all of its net investment
income in the form of quarterly dividends beginning with a distribution at the
end of the first calendar quarter of 1996. Net realized gains for the Portfolio,
if any, after reduction for any tax loss carryforwards will also be distributed
annually. Confirmations of the purchase of shares of the Portfolio through the
automatic reinvestment of income dividends and capital gains distributions will
be provided, pursuant to Rule 10b-10(b) under the Securities Exchange Act of
1934, as amended, on the next monthly client statement following such purchase
of shares. Consequently, confirmations of such purchases will not be provided at
the time of completion of such purchases, as might otherwise be required by Rule
10b-10.
Undistributed net investment income is included in the Portfolio's net
assets for the purpose of calculating net asset value per share. Therefore, on
the "ex-dividend" date, the net asset value per share excludes the dividend
(i.e., is reduced by the per share amount of the dividend). Dividends paid
shortly after the purchase of shares by an investor, although in effect a return
of capital, are taxable to shareholders subject to income tax.
Because of the distribution fee and any other expenses that may be
attributable to the Class B shares, the net income attributable to and the
dividends payable on Class B shares will be lower than the net income
attributable to and the dividends payable on Class A shares. As a result, the
net asset value per share of the classes of the Portfolio will differ at times.
Expenses of the Portfolio allocated to a particular class of shares thereof will
be borne on a pro rata basis by each outstanding share of that class.
TAXES
The following summary of certain federal income tax consequences is based on
current tax laws and regulations, which may be changed by legislative, judicial,
or administrative action.
26
<PAGE>
No attempt has been made to present a detailed explanation of the federal,
state, or local income tax treatment of the Portfolio or its shareholders.
Accordingly, shareholders are urged to consult their tax advisers regarding
specific questions as to federal, state and local income taxes.
The Portfolio is treated as a separate entity for federal income tax
purposes and is not combined with the Fund's other portfolios. It is the
Portfolio's intent to continue to qualify for the special tax treatment afforded
regulated investment companies under Subchapter M of the Code, so that the
Portfolio will continue to be relieved of federal income tax on that part of its
net investment income and net capital gain that is distributed to shareholders.
The Portfolio distributes substantially all of its net investment income
(including, for this purpose, the excess of net short-term capital gain over net
long-term capital loss) to shareholders. Dividends from the Portfolio's net
investment income are taxable to shareholders as ordinary income, whether
received in cash or in additional shares. The Portfolio will report annually to
its shareholders the amount of dividend income qualifying for the corporate
dividend received deduction.
Distributions of net capital gain (the excess of net long-term capital gain
over net short-term capital loss) are taxable to shareholders as long-term
capital gain, regardless of how long shareholders have held their shares. The
Portfolio sends reports annually to its shareholders of the federal income tax
status of all distributions made during the preceding year.
The Portfolio intends to make sufficient distributions or deemed
distributions of its ordinary income and capital gain net income (the excess of
short-term and long-term capital gains over short-term and long-term capital
losses) prior to the end of each calendar year to avoid liability for federal
excise tax.
Dividends and other distributions declared by the Portfolio in October,
November or December of any year and payable to shareholders of record on a date
in such month will be deemed to have been paid by the Portfolio and received by
the shareholders on December 31 of that year if the distributions are paid by
the Portfolio at any time during the following January.
The sale, redemption or exchange of shares may result in taxable gain or
loss to the selling, exchanging or redeeming shareholder, depending upon whether
the fair market value of the sale, exchange or redemption proceeds exceeds or is
less than the shareholder's adjusted basis in the redeemed, exchanged or sold
shares. Any such taxable gain or loss generally will be treated as long-term
capital gain or loss if the shares have been held for more than one year and
otherwise generally will be treated as short-term capital gain or loss. If
capital gain distributions have been made with respect to shares that are sold
at a loss after being held for six months or less, however, then the loss is
treated as a long-term capital loss to the extent of the capital gain
distributions.
The conversion of Class A shares to Class B shares should not be a taxable
event to the shareholder.
Investment income received by the Portfolio from sources within foreign
countries may be subject to foreign income taxes withheld at the source. To the
extent that the Portfolio is liable for foreign income taxes so withheld, the
Portfolio intends to operate so as to meet the requirements of the Code to pass
through to the shareholders credit for foreign income taxes paid. Although the
Portfolio intends to meet Code requirements to pass through credit for such
taxes, there can be no assurance that the Portfolio will be able to do so.
27
<PAGE>
Shareholders are urged to consult with their tax advisers concerning the
application of state and local income taxes to investments in the Portfolio,
which may differ from the federal income tax consequences described above.
THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED HEREIN FOR GENERAL
INFORMATION ONLY. PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS
WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN A PORTFOLIO.
PORTFOLIO TRANSACTIONS
The Investment Advisory Agreement authorizes the Adviser to select the
brokers or dealers that will execute the purchases and sales of investment
securities for the Portfolio and directs the Adviser to use its best efforts to
obtain the best available price and most favorable execution with respect to all
transactions for the Portfolio. The Fund has authorized the Adviser to pay
higher commissions in recognition of brokerage services which, in the opinion of
the Adviser, are necessary for the achievement of better execution, provided the
Adviser believes this to be in the best interest of the Fund.
Since shares of the Portfolio are not marketed through intermediary brokers
or dealers, it is not the Fund's practice to allocate brokerage or principal
business on the basis of sales of shares which may be made through such firms.
However, the Adviser may place portfolio orders with qualified broker-dealers
who recommend the Portfolio or who act as agents in the purchase of shares of
the Fund's portfolios for their clients.
In purchasing and selling securities for the Portfolio, it is the Fund's
policy to seek to obtain quality execution at the most favorable prices through
responsible broker-dealers. In selecting broker-dealers to execute the
securities transactions for the Portfolio, consideration will be given to such
factors as the price of the security, the rate of the commission, the size and
difficulty of the order, the reliability, integrity, financial condition,
general execution and operational capabilities of competing broker-dealers, and
the brokerage and research services which they provide to the Fund. Some
securities considered for investment by the Portfolio may also be appropriate
for other clients served by the Adviser. If the purchase or sale of securities
consistent with the investment policies of the Portfolio and one or more of
these other clients served by the Adviser is considered at or about the same
time, transactions in such securities will be allocated among the Portfolio and
such other clients in a manner deemed fair and reasonable by the Adviser.
Although there is no specified formula for allocating such transactions, the
various allocation methods used by the Adviser, and the results of such
allocations, are subject to periodic review by the Fund's Board of Directors.
Subject to the overriding objective of obtaining the best possible execution
of orders, the Adviser may allocate a portion of the Portfolio's brokerage
transactions to Morgan Stanley or broker affiliates of Morgan Stanley. In order
for Morgan Stanley or its affiliates to effect any portfolio transactions for
the Fund, the commissions, fees or other remuneration received by Morgan Stanley
or such affiliates must be reasonable and fair compared to the commissions, fees
or other remuneration paid to other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time. Furthermore, the Board
of Directors of the Fund, including a majority of those
28
<PAGE>
Directors who are not "interested persons," as defined in the 1940 Act, have
adopted procedures which are reasonably designed to provide that any
commissions, fees or other remuneration paid to Morgan Stanley or such
affiliates are consistent with the foregoing standard.
Portfolio securities will not be purchased from or through, or sold to or
through, the Adviser or Morgan Stanley or any "affiliated persons," as defined
in the 1940 Act of Morgan Stanley when such entities are acting as principals,
except to the extent permitted by law.
Although the Portfolio will not invest for short-term trading purposes,
investment securities may be sold from time to time without regard to the length
of time they have been held. It is anticipated that under normal circumstances,
the annual portfolio turnover rate will not exceed 100%. High portfolio turnover
involves correspondingly greater transaction costs which will be borne directly
by the respective Portfolio. In addition, high portfolio turnover may result in
more capital gains which would be taxable to the shareholders of the Portfolio.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
The Fund was organized as a Maryland corporation on June 16, 1988. The
Articles of Incorporation, as amended and restated, permit the Fund to issue up
to 34 billion shares of common stock, with $.001 par value per share. Pursuant
to the Fund's Articles of Incorporation, the Board of Directors may increase the
number of shares the Fund is authorized to issue without the approval of the
shareholders of the Fund. Subject to the notice period to shareholders with
respect to shares held by the shareholders, the Board of Directors has the power
to designate one or more classes of shares of common stock and to classify and
reclassify any unissued shares with respect to such classes. The shares of
common stock of each portfolio are currently classified into two classes, the
Class A shares and the Class B shares, except for the International Small Cap,
Money Market and Municipal Money Market Portfolios, which only offer Class A
shares.
The shares of the Portfolio, when issued, will be fully paid, nonassessable,
fully transferable and redeemable at the option of the holder. The shares have
no preference as to conversion, exchange, dividends, retirement or other
features and have no pre-emptive rights. The shares of the Portfolio have
non-cumulative voting rights, which means that the holders of more than 50% of
the shares voting for the election of Directors can elect 100% of the Directors
if they choose to do so. Persons or organizations owning 25% or more of the
outstanding shares of the Portfolio may be presumed to "control" (as defined in
the 1940 Act) the Portfolio. Under Maryland law, the Fund is not required to
hold an annual meeting of its shareholders unless required to do so under the
1940 Act.
REPORTS TO SHAREHOLDERS
The Fund will send to its shareholders annual and semi-annual reports; the
financial statements appearing in annual reports are audited by independent
accountants. Monthly unaudited portfolio data is also available from the Fund
upon request.
In addition, the Adviser, or its agent, as Transfer Agent, will send to each
shareholder having an account directly with the Fund a monthly statement showing
transactions in the account, the total number of shares owned, and any dividends
or distributions paid.
29
<PAGE>
CUSTODIAN
As of September 1, 1995, domestic securities and cash are held by Chase,
which replaced U.S. Trust as the Fund's domestic custodian. Chase is not an
affiliate of the Adviser or the Distributor. Morgan Stanley Trust Company,
Brooklyn, New York ("MSTC"), an affiliate of the Adviser and the Distributor,
acts as the Fund's custodian for foreign assets held outside the United States
and employs subcustodians approved by the Board of Directors of the Fund in
accordance with regulations of the Securities and Exchange Commission for the
purpose of providing custodial services for such assets. MSTC may also hold
certain domestic assets for the Fund. For more information on the custodians,
see "General Information -- Custody Arrangements" in the Statement of Additional
Information.
DIVIDEND DISBURSING AND TRANSFER AGENT
Chase Global Funds Services Company, 73 Tremont Street, Boston,
Massachusetts 02108-3913, acts as Dividend Disbursing and Transfer Agent for the
Fund.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP serves as independent accountants for the Fund and
audits the annual financial statements of each portfolio.
LITIGATION
The Fund is not involved in any litigation.
30
<PAGE>
<TABLE>
<CAPTION>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
U.S. REAL ESTATE PORTFOLIO
P.O. BOX 2798, BOSTON, MA 02208-2798
- ---------------------------------------------------------------------------------------------------------------
ACCOUNT REGISTRATION FORM
- ---------------------------------------------------------------------------------------------------------------
<S> <C>
ACCOUNT INFORMATION If you need assistance in filling out this form
Fill in where applicable for the Morgan Stanley Institutional Fund, please
contact your Morgan Stanley representative or call
us toll free 1-(800)-548-7786. Please print all
items except signature, and mail to the Fund at the
address above.
- ---------------------------------------------------------------------------------------------------------------
A) REGISTRATION
1. INDIVIDUAL 1. / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
First Name Initial Last Name
2. JOINT TENANTS 2. / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
(RIGHTS OF First Name Initial Last Name
SURVIVORSHIP / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
PRESUMED UNLESS First Name Initial Last Name
TENANCY IN COMMON
IS INDICATED)
- ---------------------------------------------------------------------------------------------------------------
3. CORPORATIONS, 3. / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
TRUSTS AND OTHERS
Please call the / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
Fund for additional
documents that may / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
be required to set
up account and to
authorize transactions.
Type of / / INCORPORATED / / UNINCORPORATED / / PARTNERSHIP / / UNIFORM GIFT/TRANSFER TO MINOR
Registration: ASSOCIATION (ONLY ONE CUSTODIAN AND MINOR PERMITTED)
/ / TRUST __________________________________ / / OTHER (Specify) ______________________________
- ---------------------------------------------------------------------------------------------------------------
B) MAILING ADDRESS Street or P.O. Box / / / / / / / / / / / / / / / / / / / / / / / / / / / /
Please fill in
completely, including City / / / / / / / / / / / / / State / / / Zip / / / / / /-/ / / / / / / /
telephone number(s).
Home Business
Telephone No./ / / /-/ / / /-/ / / / / Telephone No./ / / /-/ / / /-/ / / /
/ / United States / / Resident / /Non-Resident Alien:
Citizen Alien Indicate Country of Residence _________
- ---------------------------------------------------------------------------------------------------------------
C) TAXPAYER PART 1. Enter your Taxpayer C) IMPORTANT TAX INFORMATION
IDENTIFICATION Identification Number. For most You (as a payee) are required by
NUMBER individual taxpayers, this is your law to provide us (as payer) with
If the account is in Social Security Number. your correct Taxpayer Identification
more than one name, TAXPAYER IDENTIFICATION NUMBER Number. Accounts that have a missing
CIRCLE THE NAME OF THE / / / /-/ / / / / / / / / or incorrect Taxpayer Identification
PERSON WHOSE TAXPAYER OR Number will be subject to backup
IDENTIFICATION NUMBER SOCIAL SECURITY NUMBER withholding at a 31% rate on dividends,
IS PROVIDED IN SECTION / / / /-/ / /-/ / / / / distributions and other payments.
A) ABOVE. If no name PART 2. BACKUP WITHHOLDING If you have not provided us with
is circled, the number / / Check this box if you are your correct taxpayer identification
will be considered to be NOT subject to Backup number, you may be subject to
that of the last name Withholding under the a $50 penalty imposed by the Internal
listed. For Custodian provisions of Section Revenue Service.
account of a minor 3406(a)(1)(C) of the Internal Backup withholding is not an
(Uniform Gift/Transfer Revenue Code. additional tax; the tax liability of
to Minor Act), give the persons subject to backup withholding
Social Security Number will be reduced by the amount of tax
of the minor. withheld. If withholding results in
an overpayment of taxes, a refund
may be obtained. You may be notified
that you are subject to backup
withholding under Section 3406(a)(1)(C)
of the Internal Revenue Code because you
have underreported interest or dividends
or you were required to but failed to
file a return which would have included a
reportable interest or dividend payment. IF
YOU HAVE NOT BEEN SO NOTIFIED, CHECK THE
BOX IN PART 2 AT LEFT.
- ---------------------------------------------------------------------------------------------------------------
D) PORTFOLIO AND For Purchase of the following Portfolio:
CLASS SELECTION U.S. Real Estate Portfolio / / Class A Shares $____ / / Class B Shares $____
(Class A shares
minimum $500,000
for each Portfolio Total Initial Investment $_____________
and Class B shares
minimum $100,000 for
each Portfolio).
Please indicate
class and amount.
- ---------------------------------------------------------------------------------------------------------------
E) METHOD OF Payment by:
INVESTMENT / / Check (MAKE CHECK PAYABLE TO MORGAN STANLEY INSTITUTIONAL FUND, INC.--PORTFOLIO NAME)
Please
indicate
manner of / / Exchange $____________ From________________ / / / / / / / / / / /-/ /
payment. Name of Portfolio Account No.
/ / Account previously established by:
/ / Phone exchange / / Wire on___________________ / / / / / / / / / / / /-/ /
Date Account No. (Check
(Previously assigned by the Fund) Digit)
<PAGE>
- ---------------------------------------------------------------------------------------------------------------
F) DISTRIBUTION Income dividends and capital gains distributions (if any) will
OPTION be reinvested in additional shares unless either box below is
checked.
/ / Income dividends to be paid in cash, capital
gains distributions (if any) in shares.
/ / Income dividends and capital gains distributions
(if any) to be paid in cash.
- ---------------------------------------------------------------------------------------------------------------
G) TELEPHONE / / I/we hereby authorize the Fund and its ______________________ ________________
REDEMPTION agents to honor any telephone requests Name of COMMERCIAL Bank Bank Account No.
Please select at time of to wire redemption proceeds to the (Not Savings Bank)
initial application if you commercial bank indicated at rightand/or
wish to redeem shares by mail redemption proceeds to the name and ________________
telephone. A SIGNATURE address in which my/our fund account is Bank ABA No.
GUARANTEE IS REQUIRED IF registered if such requests are believed
BANK ACCOUNT IS NOT to be authentic. _________________________________________________
REGISTERED IDENTICALLY TO The Fund and the Fund's Transfer Agent will Name(s) in which your BANK Account is Established
YOUR FUND ACCOUNT. employ reasonable procedures to confirm that
instructions communicated by telephone are _________________________________________________
TELEPHONE REQUESTS FOR genuine. These procedures include requiring Bank's Street Address
REDEMPTIONS WILL NOT BE the investor to provide certain personal
HONORED UNLESS THE BOX IS identification information at the time an _________________________________________________
CHECKED. account is opened and prior to effecting each City State Zip
transaction requested by telephone. In addition,
all telephone transaction requests will be recorded
and investors may be required to provide additional
telecopied written instructions of transaction
requests. Neither the Fund nor the Transfer Agent will
be responsible for any loss, liability, cost or expense
for following instructions received by telephone that
it reasonably believes to be genuine.
- ---------------------------------------------------------------------------------------------------------------
H) INTERESTED PARTY
OPTION
In addition to the account _________________________________________________________________
statement sent to my/our Name
registered address, I/we _________________________________________________________________
hereby authorize the fund
to mail duplicate _________________________________________________________________
statements to the name and Address
address provided at right.
_________________________________________________________________
City State Zip Code
- ---------------------------------------------------------------------------------------------------------------
I) DEALER
INFORMATION _______________________ _______________________________ ___________
Representative Name Representative No. Branch No.
- ---------------------------------------------------------------------------------------------------------------
J) SIGNATURE OF The undersigned certify(ies) that I/we have full authority and legal
ALL HOLDERS capacity to purchase and redeem shares of the Fund and affirm that I/we
AND TAXPAYER have received a current Prospectus of the Morgan Stanley Institutional
CERTIFICATION Fund, Inc. and agree to be bound by its terms. UNDER THE PENALTIES OF
Sign Here > PERJURY, I/WE CERTIFY THAT THE INFORMATION PROVIDED IN SECTION C)
ABOVE IS TRUE, CORRECT AND COMPLETE.
(X) (X)
__________________________________ ______________________________________
Signature Date Signature Date
(X) (X)
__________________________________ ______________________________________
Signature Date Signature Date
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
(This page has been left blank intentionally.)
<PAGE>
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND OR THE DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER BY THE FUND OR THE DISTRIBUTOR TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION.
--------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
PAGE
----
Fund Expenses..................................... 2
Financial Highlights.............................. 4
Prospectus Summary................................ 6
Investment Objective and Policies................. 10
Additional Investment Information................. 12
Investment Limitations............................ 15
Management of the Fund............................ 16
Purchase of Shares................................ 18
Redemption of Shares.............................. 22
Shareholder Services.............................. 24
Valuation of Shares............................... 25
Performance Information........................... 26
Dividends and Capital Gains Distributions......... 26
Taxes............................................. 26
Portfolio Transactions............................ 28
General Information............................... 29
Account Registration Form
</TABLE>
U.S. REAL ESTATE PORTFOLIO
PORTFOLIO OF THE
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
Common Stock
($.001 PAR VALUE)
-------------
PROSPECTUS
-------------
Investment Adviser
Morgan Stanley
Asset Management Inc.
Distributor
Morgan Stanley & Co.
Incorporated
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
P.O. BOX 2798, BOSTON, MA 02208-2798
- ---------------------------------------
- ---------------------------------------
- ---------------------------------------
- ---------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
P R O S P E C T U S
----------------------------------------------------------------------
INTERNATIONAL MAGNUM PORTFOLIO
A PORTFOLIO OF THE
MORGAN STANLEY INSTITUTIONAL FUND, INC.
P.O. BOX 2798, BOSTON, MASSACHUSETTS 02208-2798
FOR INFORMATION CALL 1-800-548-7786
----------------
Morgan Stanley Institutional Fund, Inc. (the "Fund") is a no-load, open-end
management investment company, or mutual fund, which offers redeemable shares in
a series of diversified and non-diversified investment portfolios
("portfolios"). The Fund currently consists of twenty-eight portfolios
representing a broad range of investment choices. The Fund is designed to
provide clients with attractive alternatives for meeting their investment needs.
This prospectus (the "Prospectus") pertains to the Class A and Class B shares of
the International Magnum Portfolio (the "Portfolio"). The Class A and Class B
shares currently offered by the Portfolio have different minimum investment
requirements and fund expenses. Shares of the portfolios are offered with no
sales charge or exchange or redemption fee (with the exception of the
International Small Cap Portfolio).
The INTERNATIONAL MAGNUM PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers in accordance with
EAFE country (as defined in "Investment Objective and Policies" below)
weightings determined by the Portfolio's investment adviser.
INVESTORS SHOULD NOTE THAT THE PORTFOLIO MAY INVEST UP TO 10% OF ITS TOTAL
ASSETS IN RESTRICTED SECURITIES, AND UP TO 25% OF ITS TOTAL ASSETS IN RESTRICTED
SECURITIES THAT ARE RULE 144A SECURITIES. SEE "ADDITIONAL INVESTMENT INFORMATION
- -- NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED
SECURITIES." INVESTMENTS IN RESTRICTED SECURITIES IN EXCESS OF 5% OF THE
PORTFOLIO'S TOTAL ASSETS MAY BE CONSIDERED A SPECULATIVE ACTIVITY, MAY INVOLVE
GREATER RISK AND MAY INCREASE THE PORTFOLIO'S EXPENSES.
The Fund is designed to meet the investment needs of discerning investors
who place a premium on quality and personal service. With Morgan Stanley Asset
Management Inc. as Adviser and Administrator (the "Adviser" and the
"Administrator"), and with Morgan Stanley & Co. Incorporated ("Morgan Stanley")
as Distributor, the Fund makes available to institutional and high net worth
individual investors a series of portfolios which benefit from the investment
expertise and commitment to excellence associated with Morgan Stanley and its
affiliates.
This Prospectus is designed to set forth concisely the information about the
Fund that a prospective investor should know before investing and it should be
retained for future reference. The Fund offers additional portfolios which are
described in other prospectuses and under "Prospectus Summary" below. The Fund
currently offers the following portfolios: (i) GLOBAL AND INTERNATIONAL EQUITY
- -- Active Country Allocation, Asian Equity, Emerging-Markets, European Equity,
Global Equity, Gold, International Equity, International Magnum, International
Small Cap, Japanese Equity and Latin American Portfolios; (ii) U.S. EQUITY --
Aggressive Equity, Emerging Growth, Equity Growth, MicroCap, Small Cap Value
Equity, U.S. Real Estate and Value Equity Portfolios; (iii) EQUITY AND FIXED
INCOME -- Balanced Portfolio; (iv) FIXED INCOME -- Emerging Markets Debt, Fixed
Income, Global Fixed Income, High Yield, Mortgage-Backed Securities and
Municipal Bond Portfolios; and (v) MONEY MARKET -- Money Market and Municipal
Money Market Portfolios. Additional information about the Fund is contained in a
"Statement of Additional Information," dated May 1, 1996, which is incorporated
herein by reference. The Statement of Additional Information and the
prospectuses pertaining to the other portfolios of the Fund are available upon
request and without charge by writing or calling the Fund at the address and
telephone number set forth above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
ASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1996.
<PAGE>
FUND EXPENSES
The following table illustrates all expenses and fees that a shareholder of
the International Magnum Portfolio will incur:
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
- ------------------------------------------------------------------------------------------
<S> <C>
Maximum Sales Load Imposed on Purchases
Class A................................................................................. None
Class B................................................................................. None
Maximum Sales Load Imposed on Reinvested Dividends
Class A................................................................................. None
Class B................................................................................. None
Deferred Sales Load
Class A................................................................................. None
Class B................................................................................. None
Redemption Fees
Class A................................................................................. None
Class B................................................................................. None
Exchange Fees
Class A................................................................................. None
Class B................................................................................. None
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------------------------------------------------------------------
<S> <C>
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fee (Net of Fee Waiver)*
Class A................................................................................. 0.48%
Class B................................................................................. 0.48%
12b-1 Fees
Class A................................................................................. None
Class B................................................................................. 0.25%
Other Expenses
Class A................................................................................. 0.52%
Class B................................................................................. 0.52%
-----------
Total Operating Expenses (Net of Fee Waivers)*
Class A................................................................................. 1.00%
Class B................................................................................. 1.25%
-----------
-----------
</TABLE>
- ------------------------
* The Adviser has agreed to waive its advisory fees and/or to reimburse the
Portfolio, if necessary, if such fees would cause the Portfolio's total annual
operating expenses, as a percentage of average daily net assets, to exceed the
percentages set forth in the table above. Absent the fee waiver, the
investment advisory would be 0.80%. Absent the fee waiver and/or expense
reimbursement, the Portfolio's total operating expenses are expected to be
1.32% of the average daily net assets of the Class A shares and 1.57% of the
average daily net assets of the Class B shares. As a result of this reduction,
the Management Fee stated above is lower than the contractual fee stated under
"Management of the Fund." The Adviser reserves the right to terminate any of
its fee waivers and/or expense reimbursements at any time in its sole
discretion. For further information on Fund expenses, see "Management of the
Fund."
2
<PAGE>
The purpose of the table above is to assist the investor in understanding
the various expenses that an investor in the Portfolio will bear directly or
indirectly. The Class A and Class B expenses and fees for the Portfolio are
based on estimates, assuming that the average daily net assets of the Class A
shares and Class B shares will each be $50,000,000. "Other Expenses" include
Board of Directors' fees and expenses, amortization of organizational costs,
filing fees, professional fees and costs for shareholder reports. Due to the
continuous nature of Rule 12b-1 fees, long term Class B shareholders may pay
more than the equivalent of the maximum front-end sales charges otherwise
permitted by the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. ("NASD").
The following example illustrates the expenses that you would pay on a
$1,000 investment assuming (1) a 5% annual rate of return and (2) redemption at
the end of each time period. As noted in the table above, the Fund charges no
redemption fees of any kind. The following example is based on the total
operating expenses of the Portfolio after fee waivers.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------- ----------- --------- -----------
<S> <C> <C> <C> <C>
International Magnum Portfolio
Class A.......................................................... $ 10 $ 32 $ * $ *
Class B.......................................................... $ 13 $ 40 $ * $ *
</TABLE>
- ------------------------
* Because the Portfolio has recently commenced operations, the Fund has not
projected expenses for the Portfolio beyond the 3-year period shown.
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
The Fund intends to comply with all state laws that restrict investment
company expenses. Currently, the most restrictive state law requires that the
aggregate annual expenses of an investment company shall not exceed two and
one-half percent (2 1/2%) of the first $30 million of average net assets, two
percent (2%) of the next $70 million of average net assets, and one and one-half
percent (1 1/2%) of the remaining net assets of such investment company.
The Adviser has agreed to a reduction in the amounts payable to it, and to
reimburse the Portfolio, if necessary, if in any fiscal year the sum of the
Portfolio's expenses exceeds the limit set by applicable state law.
3
<PAGE>
PROSPECTUS SUMMARY
THE FUND
The Fund consists of twenty-eight portfolios, offering institutional
investors and high net worth individual investors a broad range of investment
choices coupled with the advantages of a no-load mutual fund with Morgan Stanley
and its affiliates providing customized services as Adviser, Administrator and
Distributor. Each portfolio offers Class A shares and, except the International
Small Cap, Money Market and Municipal Money Market Portfolios, also offers Class
B shares. Each portfolio has its own investment objective and policies designed
to meet its specific goals. This Prospectus pertains to the Class A and Class B
shares of the International Magnum Portfolio.
-The INTERNATIONAL MAGNUM PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers in accordance
with EAFE country (as defined in "Investment Objective and Policies" below)
weightings determined by the Adviser.
The other portfolios of the Fund are described in other prospectuses which
may be obtained from the Fund at the address and phone number noted on the cover
of this Prospectus. The objectives of these other portfolios are listed below.
GLOBAL AND INTERNATIONAL EQUITY:
-The ACTIVE COUNTRY ALLOCATION PORTFOLIO seeks long-term capital
appreciation by investing in accordance with country weightings determined
by the Adviser in equity securities of non-U.S. issuers which, in the
aggregate, replicate broad country indices.
-The ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Asian issuers.
-The CHINA GROWTH PORTFOLIO seeks to provide long-term capital appreciation
by investing primarily in equity securities of issuers in The People's
Republic of China, Hong Kong and Taiwan.
-The EMERGING MARKETS PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of emerging country issuers.
-The EUROPEAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of European issuers.
-The GLOBAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of issuers throughout the world,
including U.S. issuers.
-The GOLD PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of foreign and domestic issuers engaged in
gold-related activities.
-The INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers.
-The INTERNATIONAL SMALL CAP PORTFOLIO seeks long-term capital appreciation
by investing primarily in equity securities of non-U.S. issuers with equity
market capitalizations of less than $1 billion.
-The JAPANESE EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Japanese issuers.
4
<PAGE>
-The LATIN AMERICAN PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Latin American issuers and debt
securities issued or guaranteed by Latin American governments or
governmental entities.
U.S. EQUITY:
-The AGGRESSIVE EQUITY PORTFOLIO seeks capital appreciation by investing
primarily in corporate equity and equity-linked securities.
-The EMERGING GROWTH PORTFOLIO seeks long-term capital appreciation by
investing primarily in growth-oriented equity securities of small- to
medium-sized corporations.
-The EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation by
investing in growth-oriented equity securities of medium and large
capitalization companies.
-The MICROCAP PORTFOLIO seeks long-term capital appreciation by investing
primarily in growth-oriented equity securities of small corporations.
-The SMALL CAP VALUE EQUITY PORTFOLIO seeks high long-term total return by
investing in undervalued equity securities of small- to medium-sized
companies.
-The U.S. REAL ESTATE PORTFOLIO seeks to provide above average current
income and long-term capital appreciation by investing primarily in equity
securities of companies in the U.S. real estate industry, including real
estate investment trusts.
-The VALUE EQUITY PORTFOLIO seeks high total return by investing in equity
securities which the Adviser believes to be undervalued relative to the
stock market in general at the time of purchase.
EQUITY AND FIXED INCOME:
-The BALANCED PORTFOLIO seeks high total return while preserving capital by
investing in a combination of undervalued equity securities and fixed
income securities.
FIXED INCOME:
-The EMERGING MARKETS DEBT PORTFOLIO seeks high total return by investing
primarily in debt securities of government, government-related and
corporate issuers located in emerging countries.
-The FIXED INCOME PORTFOLIO seeks to produce a high total return consistent
with the preservation of capital by investing in a diversified portfolio of
fixed income securities.
-The GLOBAL FIXED INCOME PORTFOLIO seeks to produce an attractive real rate
of return while preserving capital by investing in fixed income securities
of issuers throughout the world, including U.S. issuers.
-The HIGH YIELD PORTFOLIO seeks to maximize total return by investing in a
diversified portfolio of high yield fixed income securities that offer a
yield above that generally available on debt securities in the three
highest rating categories of the recognized rating services.
-The MORTGAGE-BACKED SECURITIES PORTFOLIO seeks to produce as high a level
of current income as is consistent with the preservation of capital by
investing primarily in a variety of investment-grade mortgage-backed
securities.
-The MUNICIPAL BOND PORTFOLIO seeks to produce a high level of current
income consistent with the preservation of principal through investment
primarily in municipal obligations, the interest on which is exempt from
federal income tax.
5
<PAGE>
MONEY MARKET:
-The MONEY MARKET PORTFOLIO seeks to maximize current income and preserve
capital while maintaining high levels of liquidity through investing in
high quality money market instruments with remaining maturities of one year
or less.
-The MUNICIPAL MONEY MARKET PORTFOLIO seeks to maximize current tax-exempt
income and preserve capital while maintaining high levels of liquidity
through investing in high-quality money market instruments with remaining
maturities of one year or less which are exempt from federal income tax.
INVESTMENT MANAGEMENT
Morgan Stanley Asset Management Inc., a wholly-owned subsidiary of Morgan
Stanley Group Inc., which, together with its affiliated asset management
companies, at December 31, 1995 had approximately $57.4 billion in assets under
management as an investment manager or as a fiduciary adviser, acts as
investment adviser to the Fund and each of its portfolios. See "Management of
the Fund -- Investment Adviser" and "Management of the Fund -- Administrator."
HOW TO INVEST
Class A shares of the Portfolio are offered directly to investors at net
asset value with no sales commission or 12b-1 charges. Class B shares of the
Portfolio are offered at net asset value with no sales commission, but with a
12b-1 fee, which is accrued daily and paid quarterly, equal to 0.25%, on an
annualized basis, of the Class B shares' average daily net assets. Share
purchases may be made by sending investments directly to the Fund or through the
Distributor. The minimum initial investment for shares in a Portfolio account is
$500,000 for Class A shares and $100,000 for Class B shares. Certain exceptions
to the foregoing minimums apply to (1) Portfolio accounts held by officers of
the Adviser and its affiliates and (2) certain advisory or asset allocation
accounts, such as Total Funds Management accounts, managed by Morgan Stanley or
its affiliates, including the Adviser ("Managed Accounts"). The Adviser reserves
the right in its sole discretion to determine which of such advisory or asset
allocation accounts shall be Managed Accounts. For information regarding Managed
Accounts, please contact your Morgan Stanley account representative or the Fund
at the telephone number provided on the cover of this Prospectus. The minimum
investment levels may be waived at the discretion of the Adviser for (i) certain
employees and customers of Morgan Stanley or its affiliates and certain trust
departments, brokers, dealers, agents, financial planners, financial services
firms, or investment advisers that have entered into an agreement with Morgan
Stanley or its affiliates; and (ii) retirement and deferred compensation plans
and trusts used to fund such plans, including, but not limited to, those defined
in Section 401(a), 403(b) or 457 of the Internal Revenue Code of 1986, as
amended, and "rabbi trusts". See "Purchase of Shares -- Minimum Investment and
Account Sizes; Conversion from Class A to Class B Shares."
The minimum subsequent investment for a Portfolio account is $1,000 (except
for automatic reinvestment of dividends and capital gains distributions for
which there is no minimum). Such subsequent investments will be applied to
purchase additional shares in the same class held by a shareholder in a
Portfolio account. See "Purchase of Shares -- Additional Investments."
6
<PAGE>
HOW TO REDEEM
Class A shares or Class B shares of the Portfolio may be redeemed at any
time, without cost, at the net asset value per share of shares of the applicable
class next determined after receipt of the redemption request. The redemption
price may be more or less than the purchase price. Certain redemptions may cause
involuntary redemption or automatic conversion. Class A or Class B shares held
in a Portfolio account are subject to involuntary redemption if shareholder
redemption(s) of such shares reduces the value of such account to less than
$100,000 for a continuous 60-day period. Involuntary redemption does not apply
to Managed Accounts, regardless of the value of such accounts. Class A shares in
a Portfolio account will convert to Class B shares if shareholder redemption(s)
of such shares reduces the value of such account to less than $500,000 for a
continuous 60-day period. Class B shares in a Portfolio account will convert to
Class A shares if shareholder purchases of additional Class B shares or market
activity cause the value of the Class B shares in the Portfolio account to
increase to $500,000 or more. See "Purchase of Shares -- Minimum Account Sizes
and Involuntary Redemption of Shares" and "Redemption of Shares."
RISK FACTORS
The investment policies of the Portfolio entail certain risks and
considerations of which an investor should be aware. The Portfolio will invest
in securities of foreign issuers, including issuers in emerging countries, which
are subject to certain risks not typically associated with domestic securities,
including (1) restrictions on foreign investment and on repatriation of capital
invested in foreign countries, (2) currency fluctuations, (3) the cost of
converting foreign currency into U.S. dollars, (4) potential price volatility
and lesser liquidity of shares traded on foreign country securities markets or
lack of a secondary trading market for such securities and (5) political and
economic risks, including the risk of nationalization or expropriation of assets
and the risk of war. In addition, accounting, auditing, financial and other
reporting standards in foreign countries are not equivalent to U.S. standards
and therefore, disclosure of certain material information may not be made and
less information may be available to investors investing in foreign countries
than in the United States. There is also generally less governmental regulation
of the securities industry in foreign countries than the United States.
Moreover, it may be more difficult to obtain a judgment in a court outside the
United States. See "Investment Objective and Policies" and "Additional
Investment Information." In addition, the Portfolio may invest in repurchase
agreements, lend its portfolio securities, purchase securities on a when-issued
basis and invest in forward foreign currency exchange contracts to hedge
currency risk associated with investment in non-U.S. dollar denominated
securities. Each of these investment strategies involves specific risks which
are described under "Investment Objective and Policies" and "Additional
Investment Information" herein and under "Investment Objectives and Policies" in
the Statement of Additional Information.
7
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the International Magnum Portfolio is described
below, together with the policies the Fund employs in its efforts to achieve
this objective. The Portfolio's investment objective is a fundamental policy
which may not be changed without the approval of a majority of the Portfolio's
outstanding voting securities. There is no assurance that the Portfolio will
attain its objective. The investment policies described below are not
fundamental policies and may be changed without shareholder approval.
The investment objective of the Portfolio is to provide long-term capital
appreciation. The production of any current income is incidental to this
objective. The Portfolio seeks to achieve its objective by investing primarily
in equity securities of non-U.S. issuers in accordance with the EAFE country
(defined below) weightings determined by the Adviser. With respect to the
Portfolio, equity securities include common and preferred stocks, convertible
securities, and rights and warrants to purchase common stocks. The equity
securities in which the Portfolio may invest may be denominated in any currency.
The countries in which the Portfolio will invest are those comprising the
Morgan Stanley Capital International EAFE Index (the "Index"), which includes
Australia, Japan, New Zealand, most nations located in Western Europe and
certain developed countries in Asia, such as Hong Kong and Singapore (each an
"EAFE country," and collectively the "EAFE countries"). At least 65% of the
total assets of the Portfolio will be invested in equity securities of issuers
in at least three different EAFE countries under normal circumstances.
By analyzing a variety of macroeconomic and political factors, the Adviser
develops fundamental projections on comparative interest rates, currencies,
corporate profits and economic growth among the various regions represented in
the Index. These projections will be used to establish regional allocation
strategies. Within these regional allocations, the Adviser then selects equity
securities among issuers of a region.
The Adviser's approach in selecting among equity securities within a region
comprised of EAFE countries is oriented to individual stock selection and is
value driven. The Adviser identifies those equity securities which it believes
to be undervalued in relation to the issuer's assets, cash flow, earnings and
revenues. In selecting investments, the Adviser utilizes the research of a
number of sources, including Morgan Stanley Capital International, an affiliate
of the Adviser located in Geneva, Switzerland. Portfolio holdings are regularly
reviewed and subjected to fundamental analysis to determine whether they
continue to conform to the Adviser's investment criteria. Equity securities
which no longer conform to such investment criteria will be sold.
Although the Portfolio intends to invest primarily in equity securities
listed on a stock exchange in an EAFE country, the Portfolio may invest in
equity securities that are traded over the counter or that are not admitted to
listing on a stock exchange or dealt in a regulated market. As a result of the
absence of a public trading market, such securities may pose liquidity risks.
The Portfolio may also invest in private placements or initial public offerings
in the form of oversubscriptions. Such investments generally entail short-term
liquidity risks. See "Additional Investment Information -- Non-Publicly Traded
Securities, Private Placements and Restricted Securities."
The Portfolio may invest up to 10% of its total assets in (i) investment
funds with investment objectives similar to that of the Portfolio and (ii) for
temporary purposes, money market funds and pooled investment
8
<PAGE>
vehicles. If the Portfolio invests in other investment funds, stockholders will
bear not only their proportionate share of the expenses of the Portfolio
(including operating expenses and fees of the Investment Adviser), but also will
indirectly bear similar expenses of the underlying investment fund.
Although the Portfolio anticipates being fully invested in equity securities
of EAFE countries, the Portfolio may invest, under normal circumstances for cash
management purposes, up to 35% of its total assets in certain short-term (less
than twelve months to maturity) and medium-term (not greater than five years to
maturity) debt securities or hold cash. In addition, for temporary defensive
purposes during periods in which the Adviser believes changes in economic,
financial or political conditions make it advisable, the Portfolio may invest up
to 100% of its total assets in such short-term and medium-term debt securities
or hold cash. The Portfolio will not invest in debt securities that are not
rated at least investment grade by either Moody's Investors Service, Inc.
("Moody's") or Standard & Poor's Corporation ("S&P"). See "Additional Investment
Information -- Debt Securities and Temporary Investments."
Although the Portfolio will not invest for short-term trading purposes,
investment securities may be sold from time to time without regard to the length
of time they have been held. It is anticipated that the annual turnover rate of
the Portfolio will not exceed 100% under normal circumstances.
Any remaining assets of the Portfolio may be invested in certain securities
and obligations, including derivative securities, as set forth in "Additional
Investment Information" below.
ADDITIONAL INVESTMENT INFORMATION
DEBT SECURITIES AND TEMPORARY INVESTMENTS. The short-term and medium-term
debt securities in which the Portfolio may invest consist of (a) obligations of
governments, agencies or instrumentalities of any member state of the
Organization for Economic Cooperation and Development ("OECD"), including the
United States; (b) bank deposits and bank obligations (including certificates of
deposit, time deposits and bankers' acceptances) of banks organized under the
laws of any member state of the OECD, including the United States, denominated
in any currency; (c) finance company and corporate commercial paper and other
short-term corporate debt obligations of corporations organized under the laws
of any member state of the OECD, including the United States, meeting the
Portfolio's credit quality standards, provided that no more than 20% of the
Portfolio's assets is invested in any one of such issuers. The short-term and
medium-term debt securities in which the Portfolio may invest will be rated
investment grade by recognized rating services such as Moody's or S&P (in the
case of Moody's and S&P, meaning rated A or higher by either), or if unrated,
will be determined to be of comparable quality by the Adviser. During periods in
which the Adviser believes changes in economic, financial or political
conditions make it advisable, for temporary defensive purposes the Portfolio may
reduce its holdings in equity and other securities and may invest in certain
short-term (less than twelve months to maturity) and medium-term (not greater
than five years to maturity) debt securities or may hold cash.
DERIVATIVES. The Portfolio may invest in certain derivatives, which are
financial products or instruments that derive their value from the value of an
underlying asset, reference rate or index. The following are derivatives in
which the Portfolio may invest: convertible securities, warrants, forward
foreign currency exchange contracts, foreign currency futures contracts, stock
options, stock index futures contracts and when-
9
<PAGE>
issued and delayed delivery securities. See elsewhere in this "Additional
Investment Information" section for descriptions of these various instruments,
and see "Investment Objectives and Policies" for more information regarding any
investment policies or limitations applicable to their use.
FOREIGN CURRENCY HEDGING TRANSACTIONS. In order to hedge against foreign
currency exchange rate risks, the Portfolio may enter into forward foreign
currency exchange contracts ("forward contracts"), foreign currency futures
contracts and options on such contracts, and purchase put or call options on
foreign currencies. A forward contract involves an obligation to purchase or
sell an amount of a specified currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. Forward contracts are traded in the
interbank market conducted directly between currency traders (usually large
commercial banks). Except when used for hedging, the Portfolio's custodian will
place cash, U.S. government securities, or high-grade debt securities into a
segregated account of the Portfolio in an amount equal to the value of the
Portfolio's total assets committed to the consummation of forward contracts. If
the value of the securities placed in the segregated account declines,
additional cash or securities will be placed in the account on a daily basis so
that the value of the account will be at least equal to the amount of the
Portfolio's commitments with respect to such contracts. See "Investment
Objective and Policies -- Forward Foreign Currency Exchange Contracts" in the
Statement of Additional Information.
A foreign currency futures contract is a standardized contract for the
future delivery of a specified amount of a foreign currency at a future date at
a price set at the time of the contract. Foreign currency futures contracts
traded in the U.S. are traded on regulated exchanges. Parties to a futures
contract must make initial "margin" deposits to secure performance of the
contract, which generally range from 2% to 5% of the contract price. There also
are requirements to make "variation" margin deposits as the value of the futures
contract fluctuates. The Portfolio may not enter into foreign currency futures
contracts if the aggregate amount of initial margin deposits on the Portfolio's
futures positions, including stock index futures contracts (which are discussed
below), would exceed 5% of the value of the Portfolio's total assets. The
Portfolio also will be required to segregate assets to cover its futures
contracts obligations.
At the maturity of a forward or futures contract, the Portfolio may either
accept or make delivery of the currency specified in the contract or, prior to
maturity, enter into a closing purchase transaction involving the purchase or
sale of an offsetting contract. Closing purchase transactions with respect to
forward contracts are usually effected with the currency trader who is a party
to the original forward contract. Closing purchase transactions with respect to
futures contracts are effected on an exchange. The Portfolio will only enter
into such a forward or futures contract if it is expected that there will be a
liquid market in which to close out such contract. There can, however, be no
assurance that such a liquid market will exist in which to close a forward or
futures contract, in which case the Portfolio may suffer a loss.
Purposes for which such contracts may be used include protecting against a
decline in a foreign currency against the U.S. dollar between the trade date and
settlement date when the Portfolio purchases or sells securities, locking in the
U.S. dollar value of dividends declared on securities held by the Portfolio and
generally protecting the U.S. dollar value of securities held by the Portfolio
against exchange rate fluctuations. Such contracts will be used only as a
protective measure against the effects of fluctuating rates of currency exchange
and exchange control regulations. While such contracts may limit losses to the
Portfolio as a result of exchange rate fluctuation, they will also limit any
gains that may otherwise have been realized.
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The Portfolio may attempt to accomplish objectives similar to those
described above with respect to forward and futures contracts for currency by
means of purchasing put or call options on foreign currencies on exchanges. A
put option gives the Portfolio the right to sell a currency at the exercise
price until the expiration of the option. A call option gives the Portfolio the
right to purchase a currency at the exercise price until the expiration of the
option.
FOREIGN INVESTMENT. The Portfolio may invest in U.S. dollar-denominated
securities of foreign issuers trading in U.S. markets and in non-U.S.
dollar-denominated securities of foreign issuers. Investment in securities of
foreign issuers and in foreign branches of domestic banks involves somewhat
different investment risks than those affecting securities of U.S. domestic
issuers. There may be limited publicly available information with respect to
foreign issuers, and foreign issuers are not generally subject to uniform
accounting, auditing and financial and other reporting standards and
requirements comparable to those applicable to U.S. companies. There may also be
less government supervision and regulation of foreign securities exchanges,
brokers and listed companies than in the U.S. Many foreign securities markets
have substantially less volume than U.S. national securities exchanges, and
securities of some foreign issuers are less liquid and more volatile than
securities of comparable domestic issuers. Brokerage commissions and other
transaction costs on foreign securities exchanges are generally higher than in
the U.S. Dividends and interest paid by foreign issuers may be subject to
withholding and other foreign taxes, which may decrease the net return on
foreign investments as compared to dividends and interest paid to the Portfolio
by U.S. companies. It is not expected that the Portfolio or its shareholders
would be able to claim a credit for U.S. tax purposes with respect to any such
foreign taxes. See "Taxes." Additional risks include future political and
economic developments, the possibility that a foreign jurisdiction might impose
or change withholding taxes on income payable with respect to foreign
securities, possible seizure, nationalization or expropriation of the foreign
issuer or foreign deposits and the possible adoption of foreign governmental
restrictions such as exchange controls. Many of the emerging or developing
countries may have less stable political environments than more developed
countries. Also, it may be more difficult to obtain a judgment in a court
outside the United States. Investments in securities of foreign issuers are
frequently denominated in foreign currencies, and the Portfolio may temporarily
hold uninvested reserves in bank deposits in foreign currencies. Therefore, the
value of the Portfolio's assets as measured in U.S. dollars may be affected
favorably or unfavorably by changes in currency rates and in exchange control
regulations, and the Portfolio may incur costs in connection with conversions
between various currencies.
INVESTMENT COMPANIES. Some foreign countries have laws and regulations that
currently preclude direct foreign investment in the securities of their
companies. However, indirect foreign investment in the securities of companies
listed and traded on the stock exchanges in these countries is permitted by
certain foreign countries through investment companies which have been
specifically authorized. The Portfolio may invest in these investment companies
subject to the provisions of the Investment Company Act of 1940, as amended (the
"1940 Act"), and other applicable laws as discussed below under "Investment
Restrictions." If the Portfolio invests in such investment companies, the
Portfolio's shareholders will bear not only their proportionate share of the
expenses of the Portfolio (including operating expenses and the fees of the
Adviser), but also will indirectly bear similar expenses of the underlying
investment companies. Certain of the investment companies referred to in the
preceding paragraph are advised by the Adviser. The Portfolio may, to the extent
permitted under the 1940 Act and other applicable law, invest in these
investment companies. If the Portfolio does elect to make an investment in such
an investment company, it will only purchase the securities of such investment
company in the secondary market.
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LOANS OF PORTFOLIO SECURITIES. The Portfolio may lend its securities to
brokers, dealers, domestic and foreign banks or other financial institutions for
the purpose of increasing its net investment income. These loans must be secured
continuously by cash or equivalent collateral or by a letter of credit at least
equal to the market value of the securities loaned plus accrued interest or
income. There may be risks of delay in recovery of the securities or even loss
of rights in the collateral should the borrower of the securities fail
financially. The Portfolio will not enter into securities loan transactions
exceeding, in the aggregate, 33 1/3% of the market value of the Portfolio's
total assets. For more detailed information about securities lending, see
"Investment Objective and Policies" in the Statement of Additional Information.
MONEY MARKET INSTRUMENTS. The Portfolio is permitted to invest in money
market instruments, although the Portfolio intends to stay invested in
securities satisfying its primary investment objective to the extent practical.
The Portfolio may make money market investments pending other investment or
settlement for liquidity, or in adverse market conditions. The money market
investments permitted for the Portfolio include obligations of the U.S.
Government and its agencies and instrumentalities, obligations of foreign
sovereignties, other debt securities, commercial paper including bank
obligations, certificates of deposit (including Eurodollar certificates of
deposit) and repurchase agreements. For more detailed information about these
money market investments, see "Description of Securities and Ratings" in the
Statement of Additional Information.
NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED
SECURITIES. The Portfolio may invest in securities that are neither listed on a
stock exchange nor traded over-the-counter, including privately placed
securities. Such unlisted equity securities may involve a higher degree of
business and financial risk that can result in substantial losses. As a result
of the absence of a public trading market for these securities, they may be less
liquid than publicly traded securities. Although these securities may be resold
in privately negotiated transactions, the prices realized from these sales could
be less than those originally paid by the Portfolio or less than what may be
considered the fair value of such securities. Further, more companies whose
securities are not publicly traded may not be subject to the disclosure and
other investor protection requirements which might be applicable if their
securities were publicly traded. If such securities are required to be
registered under the securities laws of one or more jurisdictions before being
resold, the Portfolio may be required to bear the expenses of registration. As a
general matter, the Portfolio may not invest more than 15% of its net assets in
illiquid securities, including securities for which there is no readily
available secondary market, nor more than 10% of its total assets in securities
that are restricted from sale to the public without registration ("Restricted
Securities") under the Securities Act of 1933, as amended (the "1933 Act").
Nevertheless, subject to the foregoing limit on illiquid securities, the
Portfolio may invest up to 25% of its total assets in Restricted Securities that
can be offered and sold to qualified institutional buyers under Rule 144A under
that Act ("144A Securities"). The Board of Directors has adopted guidelines and
delegated to the Adviser, subject to the supervision of the Board of Directors,
the daily function of determining and monitoring the liquidity of 144A
securities. Rule 144A securities may become illiquid if qualified institutional
buyers are not interested in acquiring the securities. Investors should note
that investments of 5% of the Portfolio's total assets in restricted securities
may be considered a speculative activity and may involve greater risk and
expense to the Portfolio.
REPURCHASE AGREEMENTS. The Portfolio may enter into repurchase agreements
with brokers, dealers or banks that meet the credit guidelines established by
the Fund's Board of Directors. In a repurchase agreement, the Portfolio buys a
security from a seller that has agreed to repurchase it at a mutually agreed
upon date and price, reflecting the interest rate effective for the term of the
agreement. The term of these agreements is usually
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from overnight to one week and never exceeds one year. Repurchase agreements may
be viewed as a fully collateralized loan of money by the Portfolio to the
seller. The Portfolio always receives securities with a market value at least
equal to the purchase price (including accrued interest) as collateral, and this
value is maintained during the term of the agreement. If the seller defaults and
the collateral value declines, the Portfolio might incur a loss. If bankruptcy
proceedings are commenced with respect to the seller, the Portfolio's
realization upon the collateral may be delayed or limited. The aggregate of
certain repurchase agreements and certain other investments is limited as set
forth under "Investment Limitations."
STOCK OPTIONS AND INDEX FUTURES CONTRACTS. The Portfolio may utilize stock
options and stock index futures contracts with respect to securities in which
the Portfolio may invest in order to implement regional allocation strategies or
to hedge a portion of the Portfolio's investments. The Portfolio will engage
only in transactions in stock options and stock index futures contracts which
are traded on a recognized securities or futures exchange.
The Portfolio may write (i.e., sell) covered call options on portfolio
securities which give the purchaser the right to buy the underlying security
covered by the option from the Portfolio at the stated exercise price. A
"covered" call option means that so long as the Portfolio is obligated as the
writer of the option, it will own (i) the underlying securities subject to the
option, or (ii) securities convertible or exchangeable without the payment of
any consideration into the securities subject to the option. By selling a
covered call option, the Portfolio would become obligated during the term of the
option to deliver the securities underlying the option should the option holder
choose to exercise the option before the option's termination date. In return
for the call it has written, the Portfolio will receive from the purchaser (or
option holder) a premium which is the price of the option, less a commission
charged by a broker. The Portfolio will keep the premium regardless of whether
the option is exercised. When the Portfolio writes covered call options, it
augments its income by the premiums received and is thereby hedged to the extent
of that amount against a decline in the price of the underlying securities. The
premiums received will offset a portion of the potential loss incurred by the
Portfolio if the securities underlying the options are ultimately sold by the
Portfolio at a loss. However, during the option period, the Portfolio has, in
return for the premium on the option, given up the opportunity for capital
appreciation above the exercise price should the market price of the underlying
security increase, but has retained the risk of loss should the price of the
underlying security decline. As a matter of operating policy, the value of the
underlying securities on which stock options will be written at any one time
will not exceed 5% of the Portfolio's total assets.
The Portfolio may also write (i.e., sell) covered put options. Generally, a
put option is "covered" if the Portfolio maintains cash, U.S. Government
securities or other high grade debt obligations equal to the exercise price of
the option or if the Portfolio holds a put option on the same underlying
security with a similar or higher exercise price. By selling a covered put
option, the Portfolio incurs an obligation to buy the security underlying the
option from the purchaser of the put at the option's exercise price at any time
during the option period, at the purchaser's election (certain options written
by the Portfolio will be exercisable by the purchaser only on a specific date).
The Portfolio may sell put options to receive the premiums paid by purchasers
and to close out a long put option position. In addition, when the Adviser
wishes to purchase a security at a price lower than its current market price,
the Portfolio may write a covered put option at an exercise price reflecting the
lower purchase price sought.
The Portfolio may also purchase put or call options on individual securities
or baskets of securities. When the Portfolio purchases a call option it acquires
the right to buy a designated security at a designated price (the
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"exercise price"), and when the Portfolio purchases a put option it acquires the
right to sell a designated security at the exercise price, in each case on or
before a specified date (the "termination date"), usually not more than nine
months from the date the option is issued. The Portfolio may purchase call
options to close out a covered call position or to protect against an increase
in the price of a security it anticipates purchasing. The Portfolio may purchase
put options on securities which it holds in its portfolio to protect itself
against a decline in the value of the security. If the value of the underlying
security were to fall below the exercise price of the put purchased in an amount
greater than the premium paid for the option, the Portfolio would incur no
additional loss. The Portfolio may also purchase put options to close out
written put positions in a manner similar to call option closing purchase
transactions.
The primary risks associated with the use of options are (i) imperfect
correlation between the change in market value of the securities held by the
Portfolio and the prices of options relating to the securities purchased or sold
by the Portfolio; and (ii) possible lack of a liquid secondary market for an
option. In the opinion of the Adviser, the risk that the Portfolio will be
unable to close out an options contract will be minimized by only entering into
options transactions for which there appears to be a liquid secondary market.
The Portfolio may purchase and sell stock index futures contracts. A stock
index futures contract is an agreement to take or make delivery of an amount of
cash equal to the difference between the value of the index at the beginning and
at the end of the contract period. The Portfolio may utilize stock index futures
contracts in order to hedge against fluctuations in the price of a security it
holds or intends to acquire, to remain fully invested and to reduce transaction
costs, but not for speculation or for achieving leverage. The Portfolio may
enter into stock index futures contracts provided that not more than 5% of the
Portfolio's total assets at the time of entering into the contract or option is
required as deposit to secure obligations under such contracts and options, and
provided that not more than 20% of the Portfolio's total assets in the aggregate
is invested in stock index futures contracts.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Portfolio may purchase
securities on a when-issued or delayed delivery basis. In such transactions,
instruments are bought with payment and delivery taking place in the future in
order to secure what is considered to be an advantageous yield or price at the
time of the transaction. Delivery of and payment for these securities may take
as long as a month or more after the date of the purchase commitment but will
take place no more than 120 days after the trade date. The Portfolio will
maintain with the custodian a separate account with a segregated portfolio of
high-grade debt securities or equity securities or cash in an amount at least
equal to these commitments. The payment obligation and the interest rates that
will be received are each fixed at the time the Portfolio enters into the
commitment and no interest accrues to the Portfolio until settlement. Thus, it
is possible that the market value at the time of settlement could be higher or
lower than the purchase price if, among other factors, the general level of
interest rates has changed. It is a current policy of the Portfolio not to enter
into when-issued commitments exceeding in the aggregate 15% of the market value
of the Portfolio's total assets less liabilities, other than the obligations
created by these commitments.
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INVESTMENT LIMITATIONS
The International Magnum Portfolio is a non-diversified investment company
under the 1940 Act, which means that the Portfolio is not limited by the 1940
Act in the proportion of its total assets that may be invested in the
obligations of a single issuer. Thus, the Portfolio may invest a greater
proportion of its total assets in the securities of a smaller number of issuers
and, as a result, will be subject to greater risk with respect to its respective
portfolio securities. The Portfolio, however, intends to comply with the
diversification requirements imposed by the Internal Revenue Code of 1986, as
amended, for qualification as regulated investment companies. See "Taxes."
The Portfolio also operates under certain investment restrictions that are
deemed fundamental limitations and may be changed only with the approval of the
holders of a majority of the Portfolio's outstanding shares. See "Investment
Limitations" in the Statement of Additional Information. In addition, the
Portfolio operates under certain non-fundamental investment limitations as
described below and in the Statement of Additional Information. The Portfolio
may not (i) enter into repurchase agreements with more than seven days to
maturity if, as a result, more than 15% of the market value of the Portfolio's
net assets would be invested in such repurchase agreements and other investments
for which market quotations are not readily available or which are otherwise
illiquid; (ii) borrow money, except from banks for extraordinary or emergency
purposes, and then only in amounts up to 10% of the value of the Portfolio's
total assets, taken at cost at the time of borrowing; or purchase securities
while borrowings exceed 5% of its total assets; (iii) mortgage, pledge or
hypothecate any assets except in connection with any such borrowing in amounts
up to 10% of the value of the Portfolio's net assets at the time of borrowing;
(iv) invest in fixed time deposits with a duration of over seven calendar days;
or (v) invest in fixed time deposits with a duration of from two business days
to seven calendar days if more than 10% of the Portfolio's total assets would be
invested in these deposits.
MANAGEMENT OF THE FUND
INVESTMENT ADVISER. Morgan Stanley Asset Management Inc. is the Investment
Adviser and Administrator of the Fund and each of its portfolios. The Adviser
provides investment advice and portfolio management services pursuant to an
Investment Advisory Agreement and, subject to the supervision of the Fund's
Board of Directors, makes each of the Portfolio's day-to-day investment
decisions, arranges for the execution of portfolio transactions and generally
manages each of the Portfolio's investments. The Adviser is entitled to receive
from the International Magnum Portfolio an annual management fee, payable
quarterly, equal to 0.80% of the average daily net assets of the Portfolio.
The fees of the Portfolio, which involves international investments, are
higher than those of most investment companies but comparable to those of
investment companies with similar objectives. The Adviser has agreed to a
reduction in the fees payable to it and to reimburse the Portfolio, if
necessary, if such fees would cause total annual operating expenses of the
Portfolio to exceed 1.00% of the average daily net assets of the Class A shares
of the Portfolio and 1.25% of the average daily net assets of the Class B shares
of the Portfolio.
The Adviser, with principal offices at 1221 Avenue of the Americas, New
York, New York 10020, conducts a worldwide portfolio management business,
providing a broad range of portfolio management services to customers in the
United States and abroad, including investment advisory services to several
open-end investment companies and many closed-end investment companies. At
December 31, 1995, the Adviser, together with
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its affiliated asset management companies, managed investments totaling
approximately $57.4 billion, including approximately $41.9 billion under active
management and $15.5 billion as Named Fiduciary or Fiduciary Adviser. See
"Management of the Fund" in the Statement of Additional Information.
PORTFOLIO MANAGER. FRANCINE J. BOVICH. Francine Bovich joined the Adviser
as a Principal in 1993. She is responsible for portfolio management and
communication of the Adviser's asset allocation strategy to institutional
investor clients. Previously, Ms. Bovich was a Principal and Executive Vice
President of Westwood Management Corp. ("Westwood"), a registered investment
adviser. Before joining Westwood, she was a Managing Director of Citicorp
Investment Management, Inc. (now Chancellor Capital Management), where she was
responsible for the Institutional Investment Management group. Ms. Bovich began
her investment career with Banker's Trust Company. She holds a B.A. in Economics
from Connecticut College and an M.B.A. in Finance from New York University.
ADMINISTRATOR. The Adviser also provides the Fund with administrative
services pursuant to an Administration Agreement. The services provided under
the Administration Agreement are subject to the supervision of the Officers and
the Board of Directors of the Fund and include day-to-day administration of
matters related to the corporate existence of the Fund, maintenance of its
records, preparation of reports, supervision of the Fund's arrangements with its
custodian and assistance in the preparation of the Fund's registration
statements under federal and state laws. The Administration Agreement also
provides that the Administrator, through its agents, will provide the Fund
dividend disbursing and transfer agent services. For its services under the
Administration Agreement, the Fund pays the Adviser a monthly fee which on an
annual basis equals 0.15% of the average daily net assets of the Portfolio.
Under an agreement between the Adviser and The Chase Manhattan Bank, N.A.
("Chase"), Chase provides certain administrative services to the Fund. In a
merger completed on September 1, 1995, Chase succeeded to all of the rights and
obligations under the U.S. Trust Administration Agreement between the Adviser
and the United States Trust Company of New York ("U.S. Trust"), pursuant to
which U.S. Trust had agreed to provide certain administrative services to the
Fund. Pursuant to a delegation clause in the U.S. Trust Administration
Agreement, U.S. Trust delegated its administration responsibilities to Chase
Global Funds Services Company ("CGFSC"), formerly known as Mutual Funds Service
Company, which after the merger with Chase is a subsidiary of Chase and will
continue to provide certain administrative services to the Fund. The Adviser
supervises and monitors such administrative services provided by CGFSC. The
services provided under the Administration Agreement and the U.S. Trust
Administration Agreement are also subject to the supervision of the Board of
Directors of the Fund. The Board of Directors of the Fund has approved the
provision of services described above pursuant to the Administration Agreement
and the U.S. Trust Administration Agreement as being in the best interests of
the Fund. CGFSC's business address is 73 Tremont Street, Boston, Massachusetts
02108-3913. For additional information regarding the Administration Agreement or
the U.S. Trust Administration Agreement, see "Management of the Fund" in the
Statement of Additional Information.
DIRECTORS AND OFFICERS. Pursuant to the Fund's Articles of Incorporation,
the Board of Directors decides upon matters of general policy and reviews the
actions of the Fund's Adviser, Administrator and Distributor. The Officers of
the Fund conduct and supervise its daily business operations.
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DISTRIBUTOR. Morgan Stanley serves as the exclusive Distributor of the
shares of the Fund. Under its Distribution Agreement with the Fund, Morgan
Stanley sells shares of the Portfolio upon the terms and at the current offering
price described in this Prospectus. Morgan Stanley is not obligated to sell any
certain number of shares of the Fund.
The Portfolio currently offers only the classes of shares offered by this
Prospectus. The Portfolio may in the future offer one or more classes of shares
with features, distribution expenses or other expenses that are different from
those of the classes currently offered.
The Fund has adopted a Plan of Distribution with respect to the Class B
shares pursuant to Rule 12b-1 under the 1940 Act (the "Plan"). Under the Plan,
the Distributor is entitled to receive from the Portfolio a distribution fee,
which is accrued daily and paid quarterly, of 0.25% of the Class B shares'
average daily net assets on an annualized basis. The Distributor expects to
reallocate most of its fee to its investment representatives. The Distributor
may, in its discretion, voluntarily waive from time to time all or any portion
of its distribution fee and each of the Distributor and the Adviser is free to
make additional payments out of its own assets to promote the sale of Fund
shares, including payments that compensate financial institutions for
distribution services or shareholder services.
The Plan is designed to compensate the Distributor for its services, not to
reimburse the Distributor for its expenses, and the Distributor may retain any
portion of the fee that it does not expend in fulfillment of its obligations to
the Fund.
EXPENSES. The Portfolio is responsible for payment of certain other fees
and expenses (including legal fees, accountants' fees, custodial fees and
printing and mailing costs) specified in the Administration and Distribution
Agreements.
PURCHASE OF SHARES
Class A and Class B shares of the Portfolio may be purchased, without sales
commission, at the net asset value per share next determined after receipt of
the purchase order by the Portfolio. See "Valuation of Shares."
MINIMUM INVESTMENT AND ACCOUNT SIZES; CONVERSION FROM CLASS A TO CLASS B SHARES
For a Portfolio account, the minimum initial investment and minimum account
size are $500,000 for Class A shares and $100,000 for Class B shares. Managed
Accounts may purchase Class A shares without being subject to such minimum
initial investment or minimum account size requirements for a Portfolio account.
Officers of the Adviser and its affiliates are subject to the minimums for a
Portfolio account, except they may purchase Class B shares subject to a minimum
initial investment and minimum account size of $5,000 for a Portfolio account.
If the value of a Portfolio account containing Class A shares falls below
$500,000 (but remains at or above $100,000) because of shareholder
redemption(s), the Fund will notify the shareholder, and if the account value
remains below $500,000 (but remains at or above $100,000) for a continuous
60-day period, the Class A shares in such account will convert to Class B shares
and will be subject to the distribution fee and other features applicable to the
Class B shares. The Fund, however, will not convert Class A shares to Class B
shares based
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solely upon changes in the market that reduce the net asset value of shares.
Under current tax law, conversions between share classes are not a taxable event
to the shareholder. Managed Accounts are not subject to conversion from Class A
shares to Class B shares.
Investors may also invest in the Fund by purchasing shares through a trust
department, broker, dealer, agent, financial planner, financial services firm or
investment adviser. An investor may be charged an additional service or
transaction fee by that institution. The minimum investment levels may be waived
at the discretion of the Adviser for (i) certain employees and customers of
Morgan Stanley or its affiliates and certain trust departments, brokers,
dealers, agents, financial planners, financial services firms, or investment
advisers that have entered into an agreement with Morgan Stanley or its
affiliates; and (ii) retirement and deferred compensation plans and trusts used
to fund such plans, including, but not limited to, those defined in Section
401(a), 403(b) or 457 of the Internal Revenue Code of 1986, as amended, and
"rabbi trusts".
The Fund reserves the right to modify or terminate the conversion features
of the shares as stated above at any time upon 60 days' notice to shareholders.
MINIMUM ACCOUNT SIZES AND INVOLUNTARY REDEMPTION OF SHARES
If the value of a Portfolio account falls below $100,000 because of
shareholder redemption(s), the Fund will notify the shareholder, and if the
account value remains below $100,000 for a continuous 60-day period, the shares
in such account are subject to redemption by the Fund and, if redeemed, the net
asset value of such shares will be promptly paid to the shareholder. The Fund,
however, will not redeem shares based solely upon changes in the market that
reduce the net asset value of shares.
For purposes of redemptions by the Fund, the foregoing minimum account size
requirements do not apply to Portfolio accounts containing Class B shares held
by officers of the Adviser or its affiliates. However, if the value of such
account held by an officer of the Adviser or its affiliates falls below $5,000
because of shareholder redemption(s), the Fund will notify the shareholder, and
if the account value remains $5,000 for a continuous 60-day period, the shares
in such account are subject to redemption by the Fund and, if redeemed, the net
asset value of such shares will be promptly paid to the shareholder. Managed
Accounts are not subject to involuntary redemption.
The Fund reserves the right to modify or terminate the involuntary
redemption features of the shares as stated above at any time upon 60 days'
notice to shareholders.
CONVERSION FROM CLASS B TO CLASS A SHARES
If the value of Class B shares in a Portfolio account increases, whether due
to shareholder share purchases or market activity, to $500,000 or more, the
Class B shares will convert to Class A shares. Under current tax law, such
conversion is not a taxable event to the shareholder. Class A shares converted
from Class B shares are subject to the same minimum account size requirements
that are applicable to Portfolio accounts containing Class A shares, as stated
above. The Fund reserves the right to modify or terminate this conversion
feature at any time upon 60 days' notice to shareholders.
INITIAL PURCHASES DIRECTLY FROM THE FUND
The Fund's determination of an investor's eligibility to purchase shares of
a given class will take precedence over the investor's selection of a class.
Assuming the investor is eligible for the class, the Fund will select the most
favorable class for the investor, if the investor has not done so.
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INITIAL INVESTMENTS
1) BY CHECK. An account may be opened by completing and signing an Account
Registration Form and mailing it, together with a check ($500,000 minimum for
Class A shares of the Portfolio and $100,000 for Class B shares of the
Portfolio, with certain exceptions for Morgan Stanley employees and select
customers) payable to "Morgan Stanley Institutional Fund, Inc. --
International Magnum Portfolio", to:
Morgan Stanley Institutional Fund, Inc.
P.O. Box 2798
Boston, Massachusetts 02208-2798
Payment will be accepted only in U.S. dollars, unless prior approval for
payment by other currencies is given by the Fund. The Class(es) of shares of
the Portfolio to be purchased should be designated on the Account Registration
Form. For purchases by check, the Fund is ordinarily credited with Federal
Funds within one business day. Thus your purchase of shares by check is
ordinarily credited to your account at the net asset value per share of the
Portfolio determined on the next business day after receipt.
2) BY FEDERAL FUNDS WIRE. Purchases may be made by having your bank wire
Federal Funds to the Fund's bank account. In order to ensure prompt receipt
of your Federal Funds Wire, it is important that you follow these steps:
A. Telephone the Fund (toll free: 1-800-548-7786) and provide us with your
name, address, telephone number, Social Security or Tax Identification
Number, the portfolio(s) selected, the class selected, the amount being
wired, and by which bank. We will then provide you with a Fund account
number. (Investors with existing accounts should also notify the Fund prior
to wiring funds.)
B. Instruct your bank to wire the specified amount to the Fund's Wire
Concentration Bank Account (be sure to have your bank include the name of
the portfolio(s) selected, the class selected and the account number
assigned to you) as follows:
Chase Manhattan Bank, N.A.
One Manhattan Plaza
New York, NY 10081-1000
ABA #021000021
DDA #910-2-733293
Attn: Morgan Stanley Institutional Fund, Inc.
Ref: (Portfolio name, your account number, your account name)
Please call the Fund at 1-800-548-7786 prior to wiring funds.
C. Complete and sign the Account Registration Form and mail it to the address
shown thereon.
Purchase orders for shares of the Portfolio which are received prior to the
regular close of the NYSE (currently 4:00 p.m. Eastern Time) will be executed
at the price computed on the date of receipt as long as the Transfer Agent
receives payment by check or in Federal Funds prior to the regular close of
the NYSE on such day.
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Federal Funds purchase orders will be accepted only on a day on which the Fund
and Chase (the "Custodian Bank") are open for business. Your bank may charge a
service fee for wiring Federal Funds.
3) BY BANK WIRE. The same procedure outlined under "By Federal Funds Wire"
above must be followed in purchasing shares by bank wire. However, money
transferred by bank wire may or may not be converted into Federal Funds the
same day, depending on the time the money is received and the bank handling
the wire. Prior to such conversion, an investor's money will not be invested
and, therefore, will not be earning dividends. Your bank may charge a service
fee for wiring funds.
ADDITIONAL INVESTMENTS
You may add to your account at any time (minimum additional investment
$1,000, except for automatic reinvestment of dividends and capital gains
distributions for which there are no minimums) by purchasing shares at net asset
value by mailing a check to the Fund (payable to "Morgan Stanley Institutional
Fund, Inc. -- International Magnum Portfolio") at the above address or by wiring
monies to the Custodian Bank as outlined above. It is very important that your
account name, the portfolio name and the class selected be specified in the
letter or wire to assure proper crediting to your account. In order to ensure
that your wire orders are invested promptly, you are requested to notify one of
the Fund's representatives (toll-free 1-800-548-7786) prior to the wire date.
Additional investments will be applied to purchase additional shares in the same
class held by a shareholder in a Portfolio account.
OTHER PURCHASE INFORMATION
The purchase price of the Class A and Class B shares of the Portfolio is the
net asset value next determined after the order is received. See "Valuation of
Shares." An order received prior to the close of the New York Stock Exchange
("NYSE"), which is currently 4:00 p.m. Eastern Time, will be executed at the
price computed on the date of receipt; an order received after the close of the
NYSE will be executed at the price computed on the next day the NYSE is open as
long as the Transfer Agent receives payment by check or in Federal Funds prior
to the regular close of the NYSE on such day.
Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends. The net asset value of Class B shares will generally be
lower than the net asset value of Class A shares as a result of the distribution
expense charged to Class B shares. It is expected, however, that the net asset
value per share of the two classes will tend to converge immediately after the
recording of dividends which will differ by approximately the amount of the
distribution expense accrual differential between the classes.
In the interest of economy and convenience, and because of the operating
procedures of the Fund, certificates representing shares of the Portfolio will
not be issued. All shares purchased are confirmed to you and credited to your
account on the Fund's books maintained by the Adviser or its agents. You will
have the same rights and ownership with respect to such shares as if
certificates had been issued.
To ensure that checks are collected by the Fund, withdrawals of investments
made by check are not presently permitted until payment for the purchase has
been received, which may take up to eight business days after the date of
purchase. As a condition of this offering, if a purchase is cancelled due to
nonpayment or
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because your check does not clear, you will be responsible for any loss the Fund
or its agents incur. If you are already a shareholder, the Fund may redeem
shares from your account(s) to reimburse the Fund or its agents for any loss. In
addition, you may be prohibited or restricted from making future investments in
the Fund.
Investors may also invest in the Fund by purchasing shares through the
Distributor.
EXCESSIVE TRADING
Frequent trades involving either substantial portfolio assets or a
substantial portion of your account or accounts controlled by you can disrupt
management of a portfolio and raise its expenses. Consequently, in the interest
of all the stockholders of the Portfolio and the Portfolio's performance, the
Fund may in its discretion bar a stockholder that engages in excessive trading
of shares of any class of a portfolio from further purchases of shares of the
Fund for an indefinite period. The Fund considers excessive trading to be more
than one purchase and sale involving shares of the same class of a portfolio of
the Fund within any 120-day period. As an example, exchanging shares of
portfolios of the Fund as follows amounts to excessive trading: exchanging Class
A shares of Portfolio A for Class A shares of Portfolio B, then exchanging Class
A shares of Portfolio B for Class A shares of Portfolio C and again exchanging
Class A shares of Portfolio C for Class A shares of Portfolio B within a 120-day
period. Two types of transactions are exempt from these excessive trading
restrictions: (1) trades exclusively between money market portfolios; and (2)
trades done in connection with an asset allocation service, such as TFM
Accounts, managed or advised by MSAM and/or any of its affiliates.
REDEMPTION OF SHARES
You may withdraw all or any portion of the amount in your account by
redeeming shares at any time. Please note that purchases made by check are not
permitted to be redeemed until payment of the purchase has been collected, which
may take up to eight business days after purchase. The Fund will redeem Class A
shares or Class B shares of the Portfolio at the next determined net asset value
of shares of the applicable class. On days that both the NYSE and the Custodian
Bank are open for business, the net asset value per share of the Portfolio is
determined at the close of trading of the NYSE (currently 4:00 p.m. Eastern
Time). Shares of the Portfolio may be redeemed by mail or telephone. No charge
is made for redemption. Any redemption proceeds may be more or less than the
purchase price of your shares depending on, among other factors, the market
value of the investment securities held by the Portfolio.
BY MAIL
The Portfolio will redeem its Class A shares or Class B shares at the net
asset value determined on the date the request is received, if the request is
received in "good order" before the regular close of the NYSE. Your request
should be addressed to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798,
Boston, MA 02208-2798, except that deliveries by overnight courier should be
addressed to Morgan Stanley Institutional Fund, Inc., c/o Chase Global Funds
Services Company, 73 Tremont Street, Boston, MA 02108-3913.
"Good order" means that the request to redeem shares must include the
following documentation:
(a) A letter of instruction or a stock assignment specifying the
class and number of shares or dollar amount to be redeemed, signed by all
registered owners of the shares in the exact names in which they are registered;
(b) Any required signature guarantees (see "Further Redemption
Information" below); and
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(c) Other supporting legal documents, if required, in the case of
estates, trusts, guardianships, custodianships, corporations, pension and
profit-sharing plans and other organizations.
Shareholders who are uncertain of requirements for redemption should consult
with a Morgan Stanley Institutional Fund representative.
BY TELEPHONE
Provided you have previously elected the Telephone Redemption Option on the
Account Registration Form, you can request a redemption of your shares by
calling the Fund and requesting the redemption proceeds be mailed to you or
wired to your bank. Please contact one of Morgan Stanley Institutional Fund's
representatives for further details. In times of drastic market conditions, the
telephone redemption option may be difficult to implement. If you experience
difficulty in making a telephone redemption, your request may be made by mail or
overnight courier and will be implemented at the net asset value next determined
after it is received. Redemption requests sent to the Fund through express mail
must be mailed to the address of the Dividend Disbursing and Transfer Agent
listed under "General Information." The Fund and the Fund's transfer agent (the
"Transfer Agent") will employ reasonable procedures to confirm that the
instructions communicated by telephone are genuine. These procedures include
requiring the investor to provide certain personal identification information at
the time an account is opened and prior to effecting each transaction requested
by telephone. In addition, all telephone transaction requests will be recorded
and investors may be required to provide additional telecopied written
instructions regarding transaction requests. Neither the Fund nor the Transfer
Agent will be responsible for any loss, liability, cost or expense for following
instructions received by telephone that either of them reasonably believes to be
genuine.
To change the commercial bank or account designated to receive redemption
proceeds, a written request must be sent to the Fund at the address above.
Requests to change the bank or account must be signed by each shareholder and
each signature must be guaranteed.
FURTHER REDEMPTION INFORMATION
Normally the Fund will make payment for all shares redeemed within one
business day of receipt of the request, but in no event will payment be made
more than seven days after receipt of a redemption request in good order.
However, payments to investors redeeming shares which were purchased by check
will not be made until payment for the purchase has been collected, which may
take up to eight days after the date of purchase. The Fund may suspend the right
of redemption or postpone the date upon which redemptions are effected at times
when the NYSE is closed, or under any emergency circumstances as determined by
the Securities and Exchange Commission (the "Commission").
If the Board of Directors determines that it would be detrimental to the
best interests of the remaining shareholders of the Portfolio to make payment
wholly or partly in cash, the Fund may pay the redemption proceeds in whole or
in part by a distribution in-kind of securities held by the Portfolio in lieu of
cash in conformity with applicable rules of the Commission.
Distributions-in-kind will be made in readily marketable securities. Investors
may incur brokerage charges on the sale of portfolio securities so received in
payment of redemptions.
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To protect your account, the Fund and its agents from fraud, signature
guarantees are required for certain redemptions to verify the identity of the
person who has authorized a redemption from your account. Please contact the
Fund for further information. See "Redemption of Shares" in the Statement of
Additional Information.
SHAREHOLDER SERVICES
EXCHANGE FEATURES
You may exchange shares that you own in the Portfolio for shares of any
other available portfolio of the Fund (other than the International Equity
Portfolio, which is closed to new investors). In exchanging for shares of a
portfolio with more than one class, the class of shares you receive in the
exchange will be determined in the same manner as any other purchase of shares
and will not be based on the class of shares surrendered for the exchange.
Consequently, the same minimum initial investment and minimum account size for
determining the class of shares received in the exchange will apply. See
"Purchase of Shares." Shares of the portfolios may be exchanged by mail or
telephone. The privilege to exchange shares by telephone is automatic and made
available without shareholder election. Before you make an exchange, you should
read the prospectus of the portfolio(s) in which you seek to invest. Because an
exchange transaction is treated as a redemption followed by a purchase, an
exchange would be considered a taxable event for shareholders subject to tax.
The exchange privilege is only available with respect to portfolios that are
registered for sale in a shareholder's state of residence. The exchange
privilege may be modified or terminated by the Fund at any time upon 60 days'
notice to shareholders.
BY MAIL
In order to exchange shares by mail, you should include in the exchange
request the name, class of shares and account number of the Portfolio, the
name(s) of the portfolio(s) and class(es) of shares into which you intend to
exchange shares, and the signatures of all registered account holders. Send the
exchange request to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798,
Boston, Massachusetts 02208-2798.
BY TELEPHONE
When exchanging shares by telephone, have ready the name, class of shares
and account number of the Portfolio, the names of the portfolio(s) and class(es)
of shares into which you intend to exchange shares, your Social Security number
or Tax I.D. number, and your account address. Requests for telephone exchanges
received prior to 4:00 p.m. (Eastern Time) are processed at the close of
business that same day based on the net asset value of the class of the
portfolios involved in the exchange of shares at the close of business. Requests
received after 4:00 p.m. are processed the next business day based on the net
asset value determined at the close of business on such day. For additional
information regarding responsibility for the authenticity of telephoned
instructions, see "Redemption of Shares -- By Telephone" above.
TRANSFER OF REGISTRATION
You may transfer the registration of any of your Fund shares to another
person by writing to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798,
Boston, MA 02208-2798. As in the case of redemptions, the written request must
be received in good order before any transfer can be made. Transferring the
registration of shares may affect the eligibility of your account for a given
class of the Portfolio's shares and may result in involuntary conversion or
redemption of your shares. See "Purchase of Shares" above.
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VALUATION OF SHARES
The net asset value per share of a class of shares of the Portfolio is
determined by dividing the total market value of the Portfolio's investments and
other assets attributable to such class, less any liabilities attributable to
such class, by the total number of outstanding shares of such class of the
Portfolio. Net asset value is calculated separately for each class of the
Portfolio. Net asset value per share is determined as of the close of the NYSE
on each day that the NYSE is open for business. Price information on listed
securities is taken from the exchange where the security is primarily traded.
Securities listed on a U.S. securities exchange for which market quotations are
available are valued at the last quoted sale price on the day the valuation is
made. Securities listed on a foreign exchange are valued at their closing price.
Unlisted securities and listed securities not traded on the valuation date for
which market quotations are not readily available are valued at a price within a
range not exceeding the current asked price nor less than the current bid price.
The current bid and asked prices are determined based on the bid and asked
prices quoted on such valuation date by reputable brokers.
Bonds and other fixed income securities are valued according to the broadest
and most representative market, which will ordinarily be the over-the-counter
market. Net asset value includes interest on fixed income securities, which is
accrued daily. In addition, bonds and other fixed income securities may be
valued on the basis of prices provided by a pricing service when such prices are
believed to reflect the fair market value of such securities. The prices
provided by a pricing service are determined without regard to bid or last sale
prices, but take into account institutional size trading in similar groups of
securities and any developments related to the specific securities. Securities
not priced in this manner are valued at the most recently quoted bid price, or
when securities exchange valuations are used, at the latest quoted sale price on
the day of valuation. If there is no such reported sale, the latest quoted bid
price will be used. Securities purchased with remaining maturities of 60 days or
less are valued at amortized cost, if it approximates market value. In the event
that amortized cost does not approximate market value, market prices as
determined above will be used.
The value of other assets and securities for which no quotations are readily
available (including restricted and unlisted foreign securities) and those
securities for which it is inappropriate to determine prices in accordance with
the above-stated procedure are determined in good faith at fair value using
methods determined by the Board of Directors. For purposes of calculating net
asset value per share, all assets and liabilities initially expressed in foreign
currencies will be translated into U.S. dollars at the mean of the bid price and
asked price of such currencies against the U.S. dollar last quoted by any major
bank.
Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends for the class. Dividends will differ by approximately the
amount of the distribution expense accrual differential among the classes. The
net asset value of Class B shares will generally be lower than the net asset
value of the Class A shares as a result of the distribution expense charged to
Class B shares.
PERFORMANCE INFORMATION
The Fund may from time to time advertise total return for each class of the
Portfolio. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT INTENDED
TO INDICATE FUTURE PERFORMANCE. The "total return" shows what an investment in a
class of the Portfolio would have earned over a specified period of time (such
as one, five or ten years), assuming that all distributions and dividends by the
Portfolio were reinvested in the same class on the
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reinvestment dates during the period. Total return does not take into account
any federal or state income taxes that may be payable on dividends and
distributions or on redemption. The Fund may also include comparative
performance information in advertising or marketing the Portfolio's shares. Such
performance information may include data from Lipper Analytical Services, Inc.,
other industry publications, business periodicals, rating services and market
indices.
The performance figures for Class B shares will generally be lower than
those for Class A shares because of the distribution fee charged to Class B
shares.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All income dividends and capital gains distributions for a class of shares
will automatically be reinvested in additional shares of such class at net asset
value, except that, upon written notice to the Fund or by checking off the
appropriate box in the Distribution Option Section on the Account Registration
Form, a shareholder may elect to receive income dividends and capital gains
distributions in cash. The Portfolio expects to distribute substantially all of
its net investment income in the form of annual dividends. Net realized gains,
if any, after reduction for any available tax loss carryforwards will also be
distributed annually. Confirmations of the purchase of shares of the Portfolio
through the automatic reinvestment of income dividends and capital gains
distributions will be provided, pursuant to Rule 10b-10 under the Securities
Exchange Act of 1934, as amended, on the next monthly client statement following
such purchase of shares. Consequently, confirmations of such purchases will not
be provided at the time of completion of such purchases as might otherwise be
required by Rule 10b-10.
Undistributed net investment income is included in the Portfolio's net
assets for the purpose of calculating net asset value per share. Therefore, on
the "ex-dividend" date, the net asset value per share excludes the dividend
(i.e., is reduced by the per share amount of the dividend). Dividends paid
shortly after the purchase of shares by an investor, although in effect a return
of capital, are taxable to shareholders subject to income tax.
Because of the distribution fee and any other expenses that may be
attributable to the Class B shares, the net income attributable to and the
dividends payable on Class B shares will be lower than the net income
attributable to and the dividends payable on Class A shares. As a result, the
net asset value per share of the classes of the Portfolio will differ at times.
Expenses of the Portfolio allocated to a particular class of shares thereof will
be borne on a pro rata basis by each outstanding share of that class.
TAXES
The following summary of certain federal income tax consequences is based on
current tax laws and regulations, which may be changed by legislative, judicial,
or administrative action.
No attempt has been made to present a detailed explanation of the federal,
state, or local income tax treatment of the Portfolio or its shareholders.
Accordingly, shareholders are urged to consult their tax advisers regarding
specific questions as to federal, state and local income taxes.
The Portfolio is treated as a separate entity for federal income tax
purposes and is not combined with the Fund's other portfolios. The Portfolio
intends to qualify for the special tax treatment afforded regulated
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investment companies under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"), so that the Portfolio will be relieved of federal income
tax on that part of its net investment income and net capital gain that is
distributed to shareholders.
The Portfolio distributes substantially all of its net investment income
(including, for this purpose, net short-term capital gain) to shareholders.
Dividends from the Portfolio's net investment income are taxable to shareholders
as ordinary income, whether received in cash or reinvested in additional shares.
Such dividends paid by the Portfolio will generally not qualify for the 70%
dividends-received deduction for corporate shareholders. The Portfolio will
report annually to its shareholders the amount of dividend income qualifying for
such treatment.
Distributions of net capital gains (i.e., net long-term capital gains in
excess of net short-term capital losses) are taxable to shareholders as
long-term capital gains, regardless of how long the shareholder has held the
Portfolio's shares. The Portfolio sends reports annually to shareholders of the
federal income tax status of all distributions made during the preceding year.
The Portfolio intends to make sufficient distributions or deemed
distributions of its ordinary income and capital gain net income (the excess of
short-term and long-term capital gains over short-term and long-term capital
losses), including any available capital loss carryforwards, prior to the end of
each calendar year to avoid liability for federal excise tax.
Dividends and other distributions declared by the Portfolio in October,
November or December of any year and payable to shareholders of record on a date
in such month will be deemed to have been paid by the Portfolio and received by
the shareholders on December 31 of that year if the distributions are paid by
the Portfolio at any time during the following January.
The sale, exchange or redemption of shares may result in taxable gain or
loss to the selling, exchanging or redeeming shareholder, depending upon whether
the fair market value of the sale, exchange or redemption proceeds exceeds or is
less than the shareholder's adjusted basis in the redeemed, exchanged or sold
shares. If capital gain distributions have been made with respect to shares that
are sold at a loss after being held for six months or less, then the loss is
treated as a long-term capital loss to the extent of the capital gain
distributions.
The conversion of Class A shares to Class B shares should not be a taxable
event to the shareholder.
Shareholders are urged to consult with their tax advisers concerning the
application of state and local income taxes to investments in the Portfolio,
which may differ from the federal income tax consequences described above.
Investment income received by the Portfolio from sources within foreign
countries may be subject to foreign income taxes withheld at the source. To the
extent that the Portfolio is liable for foreign income taxes so withheld, the
Portfolio intends to operate so as to meet the requirements of the Code to pass
through to the shareholders credit for foreign income taxes paid. Although the
Portfolio intends to meet Code requirements to pass through credit for such
taxes, there can be no assurance that the Portfolio will be able to do so.
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THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED HEREIN FOR GENERAL
INFORMATION ONLY. PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS
WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN THE PORTFOLIO.
PORTFOLIO TRANSACTIONS
The Investment Advisory Agreement authorizes the Adviser to select the
brokers or dealers that will execute the purchases and sales of investment
securities for the Portfolio and directs the Adviser to use its best efforts to
obtain the best available price and most favorable execution with respect to all
transactions for the Portfolio. The Fund has authorized the Adviser to pay
higher commissions in recognition of brokerage services which, in the opinion of
the Adviser, are necessary for the achievement of better execution, provided the
Adviser believes this to be in the best interest of the Fund.
Since shares of the Portfolio are not marketed through intermediary brokers
or dealers, it is not the Fund's practice to allocate brokerage or principal
business on the basis of sales of shares which may be made through such firms.
However, the Adviser may place portfolio orders with qualified broker-dealers
who recommend the Fund's portfolios or who act as agents in the purchase of
shares of the Fund's portfolios for their clients.
In purchasing and selling securities for the Portfolio, it is the Fund's
policy to seek to obtain quality execution at the most favorable prices, through
responsible broker-dealers. In selecting broker-dealers to execute the
securities transactions for the Portfolio, consideration will be given to such
factors as the price of the security, the rate of the commission, the size and
difficulty of the order, the reliability, integrity, financial condition,
general execution and operational capabilities of competing broker-dealers, and
the brokerage and research services which they provide to the Fund. Some
securities considered for investment by the Portfolio may also be appropriate
for other clients served by the Adviser. If purchase or sale of securities
consistent with the investment policies of the Portfolio and one or more of
these other clients served by the Adviser is considered at or about the same
time, transactions in such securities will be allocated among the Portfolio and
clients in a manner deemed fair and reasonable by the Adviser. Although there is
no specified formula for allocating such transactions, the various allocation
methods used by the Adviser, and the results of such allocations, are subject to
periodic review by the Fund's Board of Directors.
Subject to the overriding objective of obtaining the best possible execution
of orders, the Adviser may allocate a portion of each portfolio's brokerage
transactions to Morgan Stanley or broker affiliates of Morgan Stanley. In order
for Morgan Stanley or its affiliates to effect any portfolio transactions for
the Fund, the commissions, fees or other remuneration received by Morgan Stanley
or such affiliates must be reasonable and fair compared to the commissions, fees
or other remuneration paid to other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time. Furthermore, the Board
of Directors of the Fund, including a majority of the Directors who are not
"interested persons," as defined in the 1940 Act, have adopted procedures which
are reasonably designed to provide that any commissions, fees or other
remuneration paid to Morgan Stanley or such affiliates are consistent with the
foregoing standard.
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Portfolio securities will not be purchased from, or through, or sold to or
through, the Adviser or Morgan Stanley or any "affiliated persons," as defined
in the 1940 Act, of Morgan Stanley when such entities are acting as principals,
except to the extent permitted by law.
Although the Portfolio will not invest for short-term trading purposes,
investment securities may be sold from time to time without regard to the length
of time they have been held. It is anticipated that the annual turnover rate of
the Portfolio will not exceed 100% in normal circumstances.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
The Fund was organized as a Maryland corporation on June 16, 1988. The
Articles of Incorporation, as amended and restated, permit the Fund to issue up
to 34 billion shares of common stock, with $.001 par value per share. Pursuant
to the Fund's Articles of Incorporation, the Board of Directors may increase the
number of shares the Fund is authorized to issue without the approval of the
shareholders of the Fund. Subject to the notice period to shareholders with
respect to shares held by shareholders, the Board of Directors has the power to
designate one or more classes of shares of common stock and to classify and
reclassify any unissued shares with respect to such classes. The shares of
common stock of each portfolio are currently classified into two classes, the
Class A shares and the Class B shares, except for the International Small Cap,
Money Market and Municipal Money Market Portfolios, which only offer Class A
shares.
The shares of the Portfolio, when issued, will be fully paid, nonassessable,
fully transferable and redeemable at the option of the holder. The shares have
no preference as to conversion, exchange, dividends, retirement or other
features and have no preemptive rights. The shares of the Portfolio have
non-cumulative voting rights, which means that the holders of more than 50% of
the shares voting for the election of Directors can elect 100% of the Directors
if they choose to do so. Persons or organizations owning 25% or more of the
outstanding shares of the Portfolio may be presumed to "control" (as that term
is defined in the 1940 Act) the Portfolio. Under Maryland law, the Fund is not
required to hold an annual meeting of its shareholders unless required to do so
under the 1940 Act.
REPORTS TO SHAREHOLDERS
The Fund will send to its shareholders annual and semi-annual reports; the
financial statements appearing in annual reports are audited by independent
accountants. Monthly unaudited portfolio data is also available from the Fund
upon request.
In addition, the Adviser or its agent, as Transfer Agent, will send to each
shareholder having an account directly with the Fund a monthly statement showing
transactions in the account, the total number of shares owned, and any dividends
or distributions paid.
CUSTODIAN
As of September 1, 1995, domestic securities and cash are held by Chase,
which replaced U.S. Trust as the Fund's domestic custodian. Chase is not an
affiliate of the Adviser or the Distributor. Morgan Stanley Trust Company,
Brooklyn, New York ("MSTC"), an affiliate of the Adviser and the Distributor,
acts as the Fund's custodian for foreign assets held outside the United States
and employs subcustodians approved by the Board of Directors of the Fund in
accordance with regulations of the Securities and Exchange Commission for the
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purpose of providing custodial services for such assets. MSTC may also hold
certain domestic assets for the Fund. For more information on the custodians,
see "General Information -- Custody Arrangements" in the Statement of Additional
Information.
DIVIDEND DISBURSING AND TRANSFER AGENT
Chase Global Funds Services Company, 73 Tremont Street, Boston,
Massachusetts 02108-3913, acts as Dividend Disbursing and Transfer Agent for the
Fund.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP serves as independent accountants for the Fund and
audits its annual financial statements.
LITIGATION
The Fund is not involved in any litigation.
29
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<TABLE>
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MORGAN STANLEY INSTITUTIONAL FUND, INC.
INTERNATIONAL MAGNUM PORTFOLIO
P.O. BOX 2798, BOSTON, MA 02208-2798
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ACCOUNT REGISTRATION FORM
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<S> <C>
ACCOUNT INFORMATION If you need assistance in filling out this form
Fill in where applicable for the Morgan Stanley Institutional Fund, please
contact your Morgan Stanley representative or call
us toll free 1 (800) 548-7786. Please print all
items except signature, and mail to the Fund at the
address above.
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A) REGISTRATION
1. INDIVIDUAL 1. / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
First Name Initial Last Name
2. JOINT TENANTS 2. / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
(RIGHTS OF First Name Initial Last Name
SURVIVORSHIP / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
PRESUMED UNLESS First Name Initial Last Name
TENANCY IN COMMON
IS INDICATED)
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3. CORPORATIONS, 3. / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
TRUSTS AND OTHERS
Please call the / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
Fund for additional
documents that may / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
be required to set
up account and to
authorize transactions
Type of / / INCORPORATED / / UNINCORPORATED / / PARTNERSHIP / / UNIFORM GIFT/TRANSFER TO MINOR
Registration: ASSOCIATION (ONLY ONE CUSTODIAN AND MINOR PERMITTED)
/ / TRUST __________________________________ / / OTHER (Specify) ______________________________
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B) MAILING ADDRESS Street or P.O. Box / / / / / / / / / / / / / / / / / / / / / / / / / / / /
Please fill in
completely, including City / / / / / / / / / / / / / State / / / Zip / / / / / /-/ / / / / / / /
telephone number(s).
Home Business
Telephone No./ / / /-/ / / /-/ / / / / Telephone No./ / / /-/ / / /-/ / / /
/ / United States / / Resident / /Non-Resident Alien:
Citizen Alien Indicate Country of Residence _________
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C) TAXPAYER PART 1. Enter your Taxpayer IMPORTANT TAX INFORMATION
IDENTIFICATION Identification Number. For most You (as a payee) are required by
NUMBER individual taxpayers, this is your law to provide us (as payer) with
If the account is in Social Security Number. your correct Taxpayer Identification
more than one name, TAXPAYER IDENTIFICATION NUMBER Number. Accounts that have a missing
CIRCLE THE NAME OF THE / / / /-/ / / / / / / / / or incorrect Taxpayer Identification
PERSON WHOSE TAXPAYER OR Number will be subject to backup
IDENTIFICATION NUMBER SOCIAL SECURITY NUMBER withholding at a 31% rate on dividends,
IS PROVIDED IN SECTION / / / /-/ / /-/ / / / / distributions and other payments.
A) ABOVE. If no name PART 2. BACKUP WITHHOLDING If you have not provided us with
is circled, the number / / Check this box if you are your correct taxpayer identification
will be considered to be NOT subject to Backup number, you may be subject to
that of the last name Withholding under the a $50 penalty imposed by the Internal
listed. For Custodian provisions of Section Revenue Service.
account of a minor 3406(a)(1)(C) of the Internal Backup withholding is not an
(Uniform Gift/Transfer Revenue Code. additional tax; the tax liability of
to Minor Act), give the persons subject to backup withholding
Social Security Number will be reduced by the amount of tax
of the minor. withheld. If withholding results in
an overpayment of taxes, a refund
may be obtained. You may be notified
that you are subject to backup
withholding under Section 3406(a)(1)(C)
of the Internal Revenue Code because you
have underreported interest or dividends
or you were required to but failed to
file a return which would have included a
reportable interest or dividend payment. IF
YOU HAVE NOT BEEN SO NOTIFIED, CHECK THE
BOX IN PART 2 AT LEFT.
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D) PORTFOLIO AND For Purchase of the following Portfolio:
CLASS SELECTION International Magnum Portfolio / / Class A Share ____ / / Class B Shares ____
(Class A shares
minimum $500,000
and Class B shares Total Initial Investment $_____________
minimum $100,000).
Please indicate
class and amount.
- ---------------------------------------------------------------------------------------------------------------
E) METHOD OF Payment by:
INVESTMENT / / Check (MAKE CHECK PAYABLE TO MORGAN STANLEY INSTITUTIONAL
FUND, INC.--INTERNATIONAL MAGNUM PORTFOLIO)
Please
indicate
manner of / / Exchange $____________ From________________ / / / / / / / / / / /-/ /
payment. Name of Portfolio Account No.
/ / Account previously established by:
/ / Phone exchange / / Wire on___________________ / / / / / / / / / / / /-/ /
Date Account No. (Check
(Previously assigned by the Fund) Digit)
<PAGE>
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F) DISTRIBUTION Income dividends and capital gains distributions (if any) will
OPTION be reinvested in additional shares unless either box below is
checked.
/ / Income dividends to be paid in cash, capital
gains distributions (if any) in shares.
/ / Income dividends and capital gains distributions
(if any) to be paid in cash.
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G) TELEPHONE / / I/we hereby authorize the Fund and its ______________________ ________________
REDEMPTION agents to honor any telephone requests Name of COMMERCIAL Bank Bank Account No.
OPTION to wire redemption proceeds to the (Not Savings Bank)
Please select at time of commercial bank indicated at right and/or
initial application if you mail redemption proceeds to the name and ________________
wish to redeem shares by address in which my/our fund account is Bank ABA No.
telephone. A SIGNATURE registered if such requests are believed
GUARANTEE IS REQUIRED IF to be authentic. _________________________________________________
BANK ACCOUNT IS NOT The Fund and the Fund's D.S. Transfer Agent Name(s) in which your BANK Account is Established
REGISTERED IDENTICALLY TO will employ reasonable procedures to confirm
YOUR FUND ACCOUNT. that instructions communicated by telephone are _________________________________________________
genuine. These procedures include requiring Bank's Street Address
TELEPHONE REQUESTS FOR the investor to provide certain personal
REDEMPTIONS OR EXCHANGES identification information at the time an _________________________________________________
WILL NOT BE HONORED UNLESS account is opened and prior to effecting each City State Zip
THE BOX IS CHECKED. transaction requested by telephone. In addition,
all telephone transaction requests will be recorded
and investors may be required to provide additional
telecopied written instructions of transaction
requests. Neither the Fund nor the Transfer Agent will
be responsible for any loss, liability, cost or expense
for following instructions received by telephone that
it reasonably believes to be genuine.
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H) INTERESTED PARTY
OPTION
In addition to the account _________________________________________________________________
statement sent to my/our Name
registered address, I/we _________________________________________________________________
hereby authorize the fund
to mail duplicate _________________________________________________________________
statements to the name and Address
address provided at right.
_________________________________________________________________
City State Zip Code
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I) DEALER
INFORMATION _______________________ _______________________________ ___________
Representative Name Representative No. Branch No.
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J) SIGNATURE OF The undersigned certify that I/we have full authority and legal
ALL HOLDERS capacity to purchase and redeem shares of the Fund and affirm that I/we
AND TAXPAYER have received a current Prospectus of the Morgan Stanley Institutional
CERTIFICATION Fund, Inc. and agree to be bound by its terms.
Sign Here >
(X) (X)
__________________________________ ______________________________________
Signature Date Signature Date
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</TABLE>
<PAGE>
(This page has been left blank intentionally.)
<PAGE>
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NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND OR THE DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER BY THE FUND OR THE DISTRIBUTOR TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION.
--------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
PAGE
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Fund Expenses..................................... 2
Prospectus Summary................................ 4
Investment Objective and Policies................. 8
Additional Investment Information................. 9
Investment Limitations............................ 15
Management of the Fund............................ 15
Purchase of Shares................................ 17
Redemption of Shares.............................. 21
Shareholder Services.............................. 23
Valuation of Shares............................... 24
Performance Information........................... 24
Dividends and Capital Gains Distributions......... 25
Taxes............................................. 25
Portfolio Transactions............................ 27
General Information............................... 28
Account Registration Form
</TABLE>
INTERNATIONAL MAGNUM PORTFOLIO
A PORTFOLIO OF THE
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
Common Stock
($.001 PAR VALUE)
-------------
PROSPECTUS
-------------
Investment Adviser
Morgan Stanley
Asset Management Inc.
Distributor
Morgan Stanley & Co.
Incorporated
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
P.O. BOX 2798, BOSTON, MA 02208-2798
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<PAGE>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
Morgan Stanley Institutional Fund, Inc. (the "Fund") is a no-load, open-end
management investment company with diversified and non-diversified series
("Portfolios"). The Fund currently consists of twenty-eight Portfolios offering
a broad range of investment choices. The Fund is designed to provide clients
with attractive alternatives for meeting their investment needs. Each
Portfolio, except the Money Market, Municipal Money Market, International Small
Cap and China Growth Portfolios, offers two classes of shares, the Class A
shares and the Class B shares (each, a "Multiclass Portfolio"). Each Multiclass
Portfolio, except the International Magnum Portfolio, offered one class of
shares until January 2, 1996, when all shares of such Portfolios owned prior to
January 2, 1996 were redesignated Class A shares. The Class A shares and the
Class B shares currently offered by each Multiclass Portfolio have different
minimum investment requirements and fund expenses. Shares of each Portfolio are
offered with no sales charge or exchange or redemption fee (with the exception
of the International Small Cap Portfolio). This Statement of Additional
Information addresses information of the Fund applicable to each of the twenty-
eight Portfolios.
This Statement is not a prospectus but should be read in conjunction with
the several prospectuses of the Fund's Portfolios (the "Prospectuses"). To
obtain any of the Prospectuses, please call the Morgan Stanley Institutional
Fund, Inc. Services Group at 1-800-548-7786.
TABLE OF CONTENTS
PAGE
----
Investment Objectives and Policies . . . . . . . . . . . . . . . . . . . . 2
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Special Tax Considerations Relating to Municipal Bond and
Municipal Money Market Portfolios . . . . . . . . . . . . . . . . . . . 14
Special Tax Considerations Relating to Foreign Investments . . . . . . . . 15
Taxes and Foreign Shareholders . . . . . . . . . . . . . . . . . . . . . . 16
Purchase of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Redemption of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Shareholder Services . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Investment Limitations . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Determining Maturities of Certain Instruments. . . . . . . . . . . . . . . 19
Management of the Fund . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Net Asset Value for Money Market Portfolios. . . . . . . . . . . . . . . . 29
Performance Information. . . . . . . . . . . . . . . . . . . . . . . . . . 30
General Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Description of Securities and Ratings. . . . . . . . . . . . . . . . . . . 37
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
STATEMENT OF ADDITIONAL INFORMATION DATED MAY 1, 1996, RELATING TO:
Prospectus for the International Magnum Portfolio, dated May 1, 1996
Prospectus for the U.S. Real Estate Portfolio, dated May 1, 1996
Prospectus for the Fixed Income Portfolio, Global Fixed Income Portfolio,
Municipal Bond Portfolio, Mortgage-Backed Securities Portfolio, High Yield
Portfolio, Money Market Portfolio and Municipal Money Market Portfolio,
dated May 1, 1996
Prospectus for the Equity Growth Portfolio, Emerging Growth Portfolio,
MicroCap Portfolio and Aggressive Equity Portfolio, dated May 1, 1996
Prospectus for the Small Cap Value Equity Portfolio, Value Equity Portfolio
and Balanced Portfolio, dated May 1, 1996
Prospectus for the Global Equity Portfolio, International Equity Portfolio,
International Small Cap Portfolio, Asian Equity Portfolio, European Equity
Portfolio, Japanese Equity Portfolio and Latin American Portfolio, dated
May 1, 1996
Prospectus for the Emerging Markets Portfolio and Emerging Markets Debt
Portfolio, dated May 1, 1996
Prospectus for the Active Country Allocation Portfolio, dated May 1, 1996
Prospectus for the Gold Portfolio, dated May 1, 1996
Prospectus for the China Growth Portfolio, dated April 13, 1994
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The following policies supplement the investment objectives and policies
set forth in the Fund's Prospectuses:
CURRENCY SWAPS
The China Growth Portfolio may enter into currency swaps for hedging
purposes and non-hedging purposes. Inasmuch as swaps are entered into for good
faith hedging purposes and are offset by a segregated account as described
below, the Portfolio believes that swaps do not constitute senior securities as
defined in the 1940 Act and, accordingly, will not treat them as being subject
to the Portfolio's borrowing restrictions. An amount of cash or liquid high
grade debt securities (i.e., securities rated in one of the top three ratings
categories by Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's
Ratings Group ("S&P"), or, if unrated, deemed by the Adviser to be of comparable
credit quality) having an aggregate net asset value at least equal to the gross
payments which the Portfolio is obligated to make under the currency swap will
be maintained in a segregated account by the Fund's Custodian. The Portfolio
will not enter into any currency swap unless the credit quality of the unsecured
senior debt or the claims-paying ability of the other party thereto is
considered to be investment grade by the Adviser. If there is a default by the
other party to such a transaction, the Portfolio will have contractual remedies
pursuant to the agreements related to the transaction. The swap market has
grown substantially in recent years with a large number of banks and investment
banking firms acting both as principals and as agents utilizing standardized
swap documentation. As a result, the swap market has become relatively liquid
in comparison with the markets for other similar instruments which are traded in
the interbank market.
EMERGING COUNTRY EQUITY AND DEBT SECURITIES
GENERAL. Each of the Emerging Markets and Emerging Markets Debt Portfolio's
definition of emerging country equity or debt securities includes securities of
companies that may have characteristics and business relationships common to
companies in a country or countries other than an emerging country. As a result,
the value of the securities of such companies may reflect economic and market
forces applicable to other countries, as well as to an emerging country. Morgan
Stanley Asset Management Inc. (the "Adviser") believes, however, that investment
in such companies will be appropriate because the Portfolio will invest only in
those companies which, in its view, have sufficiently strong exposure to
economic and market forces in an emerging country such that their value will
tend to reflect developments in such emerging country to a greater extent than
developments in another country or countries. For example, the Portfolio may
invest in companies organized and located in countries other than an emerging
country, including companies having their entire production facilities outside
of an emerging country, when securities of such companies meet one or more
elements of the Portfolio's definition of an emerging country equity or debt
security and so long as the Adviser believes at the time of investment that the
value of the company's securities will reflect principally conditions in such
emerging country.
The Emerging Markets Debt Portfolio is subject to no restrictions on the
maturities of the emerging country debt securities it holds; those maturities
may range from overnight to 30 years. The value of debt securities held by the
Portfolio generally will vary inversely to changes in prevailing interest rates.
The Portfolio's investments in fixed-rated debt securities with longer terms to
maturity are subject to greater volatility than the Portfolio's investments in
shorter-term obligations. Debt obligations acquired at a discount are subject
to greater fluctuations of market value in response to changing interest rates
than debt obligations of comparable maturities which are not subject to such
discount.
Investments in emerging country government debt securities involve special
risks. Certain emerging countries have historically experienced, and may
continue to experience, high rates of inflation, high interest rates, exchange
rate fluctuations, large amounts of external debt, balance of payments and trade
difficulties and extreme poverty and unemployment. The issuer or governmental
authority that controls the repayment of an emerging country's debt may not be
able or willing to repay the principal and/or interest when due in accordance
with the terms of such debt. As a result of the foregoing, a government obligor
may default on its obligations. If such an event occurs, the Portfolio may have
limited legal recourse against the issuer and/or guarantor. Remedies must, in
some cases, be pursued in the courts of the defaulting party itself, and the
ability of the holder of foreign government debt securities to obtain recourse
may be subject to the political climate in the relevant country. In addition,
no assurance can be given that the holders of commercial bank debt will not
contest payments to the holders of other foreign government debt obligations in
the event of default under their commercial bank loan agreements.
BRADY BONDS. The Emerging Markets Debt Portfolio may invest in certain debt
obligations customarily referred to as "Brady Bonds," which are created through
the exchange of existing commercial bank loans to foreign entities for new
obligations in connection with debt restructuring under a plan introduced by
former U.S. Secretary of the Treasury Nicholas F. Brady (the "Brady Plan").
Brady Bonds have been issued only recently, and, accordingly, do not have a long
payment history. They may be collateralized or uncollateralized and issued in
various currencies (although most are U.S. dollar-denominated) and they are
actively traded in the over-
2
<PAGE>
the-counter secondary market. The Portfolio may purchase Brady Bonds either in
the primary or secondary markets. The price and yield of Brady Bonds purchased
in the secondary market will reflect the market conditions at the time of
purchase, regardless of the stated face amount and the stated interest rate.
With respect to Brady Bonds with no or limited collateralization, the Portfolio
will rely for payment of interest and principal primarily on the willingness and
ability of the issuing government to make payment in accordance with the terms
of the bonds.
U.S. dollar-denominated, collateralized Brady Bonds, which may be fixed
rate par bonds or floating rate discount bonds, are generally collateralized in
full as to principal due at maturity by U.S. Treasury zero coupon obligations
which have the same maturity as the Brady Bonds. Interest payments on these
Brady Bonds generally are collateralized by cash or securities in an amount
that, in the case of fixed rate bonds, is equal to at least one year of rolling
interest payments or, in the case of floating rate bonds, initially is equal to
at least one year's rolling interest payments based on the applicable interest
rate at that time and is adjusted at regular intervals thereafter. Certain
Brady Bonds are entitled to "value recovery payments" in certain circumstances,
which in effect constitute supplemental interest payments but generally are not
collateralized. Brady Bonds are often viewed as having three or four valuation
components: (i) the collateralized repayment of principal at final maturity;
(ii) the collateralized interest payments; (iii) the uncollateralized interest
payments; and (iv) any uncollateralized repayment of principal at maturity
(these uncollateralized amounts constitute the "residual risk"). In the event
of a default with respect to collateralized Brady Bonds as a result of which the
payment obligations of the issuer are accelerated, the U.S. Treasury zero coupon
obligations held as collateral for the payment of principal will not be
distributed to investors, nor will such obligations be sold and the proceeds
distributed. The collateral will be held to the scheduled maturity of the
defaulted Brady Bonds by the collateral agent, at which time the face amount of
the collateral will equal the principal payments which would have then been due
on the Brady Bonds in the normal course. In addition, in light of the residual
risk of the Brady Bonds and, among other factors, the history of defaults with
respect to commercial bank loans by public and private entities of countries
issuing Brady Bonds, investments in Brady Bonds should be viewed as speculative.
Brady Plan debt restructuring totalling approximately $73 billion have been
implemented to date in Argentina, Bulgaria, Costa Rica, Ecuador, Mexico,
Nigeria, the Philippines, Uruguay and Venezuela, with the largest proportion of
Brady Bonds having been issued to date by Mexico and Venezuela. Brazil and
Poland have announced plans to issue Brady Bonds aggregating approximately $52
billion, based on current estimates. There can be no assurance that the
circumstances regarding the issuance of Brady Bonds by these countries will not
change.
STRUCTURED SECURITIES. The Emerging Markets Debt Portfolio may also invest a
portion of its assets in interests in entities organized and operated solely for
the purpose of restructuring the investment characteristics of sovereign debt
obligations. This type of restructuring involves the deposit with or purchase
by an entity, such as a corporation or trust, of specified instruments (such as
commercial bank loans or Brady Bonds) and the issuance by that entity of one or
more classes of securities ("Structured Securities") backed by, or representing
interests in, the underlying instruments. The cash flow on the underlying
instruments may be apportioned among the newly issued Structured Securities to
create securities with different investment characteristics such as varying
maturities, payment priorities and interest rate provisions, and the extent of
the payments made with respect to Structured Securities is dependent on the
extent of the cash flow on the underlying instruments. Because Structured
Securities of the type in which the Portfolio anticipates it will invest
typically involve no credit enhancement, their credit risk generally will be
equivalent to that of the underlying instruments. The Portfolio is permitted to
invest in a class of Structured Securities that is either subordinated or
unsubordinated to the right of payment of another class. Subordinated
Structured Securities typically have higher yields and present greater risks
than unsubordinated Structured Securities. Certain issuers of Structured
Securities may be deemed to be "investment companies" as defined in the 1940
Act. As a result, the Portfolio's investment in these Structured Securities
may be limited by restrictions contained in the 1940 Act. Structured Securities
are typically sold in private placement transactions, and there currently is no
active trading market for Structured Securities.
LOAN PARTICIPATIONS AND ASSIGNMENTS. The Emerging Markets Debt Portfolio may
also invest in fixed and floating rate loans ("Loans") arranged through private
negotiations between an issuer of sovereign debt obligations and one or more
financial institutions ("Lenders"). The Portfolio's investments in Loans are
expected in most instances to be in the form of participations in Loans
("Participations") and assignments of all or a portion of Loans ("Assignments")
from third parties. The Portfolio's investment in Participations typically will
result in the Portfolio having a contractual relationship only with the Lender
and not with the borrower. The Portfolio will have the right to receive
payments of principal, interest and any fees to which it is entitled only from
the Lender selling the Participation and only upon receipt by the Lender of the
payments from the borrower. In connection with purchasing Participations, the
Portfolio generally will have no right to enforce compliance by the borrower
with the terms of the loan agreement relating to the Loan, nor any rights of
set-off against the borrower, and the Portfolio may not directly benefit from
any collateral supporting the Loan in which it has purchased the Participation.
As a result, the Portfolio may be subject to the credit risk of both the
borrower and the Lender that is selling the Participation. In the event of the
insolvency of the Lender selling a Participation, the Portfolio may be treated
as a general creditor of the Lender and may not benefit from any set-off between
the Lender and the
3
<PAGE>
borrower. Certain Participations may be structured in a manner designed to avoid
purchasers of Participations being subject to the credit risk of the Lender with
respect to the Participation, but even under such a structure, in the event of
the Lender's insolvency, the Lender's servicing of the Participation may be
delayed and the assignability of the Participation impaired. The Portfolio will
acquire Participations only if the Lender interpositioned between the Portfolio
and the borrower is determined by the Adviser to be creditworthy.
When the Portfolio purchases Assignments from Lenders it will acquire
direct rights against the borrower on the Loan. Because Assignments are arranged
through private negotiations between potential assignees and potential
assignors, however, the rights and obligations acquired by the Portfolio as the
purchaser of an Assignment may differ from, and be more limited than, those held
by the assigning Lender. The assignability of certain sovereign debt
obligations is restricted by the governing documentation as to the nature of the
assignee such that the only way in which the Portfolio may acquire an interest
in a loan is through a Participation and not an Assignment. The Portfolio may
have difficulty disposing of Assignments and Participations because to do so it
will have to assign such securities to a third party. Because there is no
liquid market for such securities, the Portfolio anticipates that such
securities could be sold only to a limited number of institutional investors.
The lack of a liquid secondary market may have an adverse impact on the value of
such securities and the Portfolio's ability to dispose of particular Assignments
or Participations when necessary to meet the Portfolio's liquidity needs or in
response to a specific economic event such as a deterioration in the
creditworthiness of the borrower. The lack of a liquid secondary market for
Assignments and Participations also may make it more difficult for the Portfolio
to assign a value to these securities for purposes of valuing the Portfolio's
securities and calculating its net asset value.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
The U.S. dollar value of the assets of the Global Equity, International
Equity, International Small Cap, Asian Equity, European Equity, Japanese Equity,
Latin American, International Magnum, Global Fixed Income, Active Country
Allocation, China Growth, Emerging Markets, Emerging Markets Debt and Gold
Portfolios and, to the extent they invest in securities denominated in foreign
currencies, the assets of the Emerging Growth, MicroCap, Aggressive Equity,
Small Cap Value Equity, Value Equity, Balanced, Fixed Income and High Yield
Portfolios may be affected favorably or unfavorably by changes in foreign
currency exchange rates and exchange control regulations, and the Portfolios may
incur costs in connection with conversions between various currencies. The
Portfolios will conduct their foreign currency exchange transactions either on a
spot (i.e., cash) basis at the spot rate prevailing in the foreign currency
exchange market, or through entering into forward contracts to purchase or sell
foreign currencies. A forward currency exchange contract involves an obligation
to purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. These contracts are traded in the
interbank market conducted directly between currency traders (usually large
commercial banks) and their customers. A forward contract generally has no
deposit requirement, and no commissions are charged at any stage for such
trades. The Gold Portfolio may also enter into precious metals forward
contracts. See "Precious Metals Forward and Futures Contracts and Options"
below.
The Portfolios may enter into forward foreign currency exchange contracts
in several circumstances. When a Portfolio enters into a contract for the
purchase or sale of a security denominated in a foreign currency, or when a
Portfolio anticipates the receipt in a foreign currency of dividends or interest
payments on a security which it holds, the Portfolio may desire to "lock-in" the
U.S. dollar price of the security or the U.S. dollar equivalent of such dividend
or interest payment, as the case may be. By entering into a forward contract
for a fixed amount of dollars, for the purchase or sale of the amount of foreign
currency involved in the underlying transactions, the Portfolio will be able to
protect itself against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar and the subject foreign currency during the
period between the date on which the security is purchased or sold, or on which
the dividend or interest payment is declared, and the date on which such
payments are made or received.
Additionally, when any of these Portfolios anticipates that the currency of
a particular foreign country may suffer a substantial decline against the U.S.
dollar, it may enter into a forward contract for a fixed amount of dollars, to
sell the amount of foreign currency approximating the value of some or all of
such Portfolio's securities denominated in such foreign currency. The precise
matching of the forward contract amounts and the value of the securities
involved will not generally be possible since the future value of securities in
foreign currencies will change as a consequence of market movements in the value
of these securities between the date on which the forward contract is entered
into and the date it matures. The projection of short-term currency market
movement is extremely difficult, and the successful execution of a short-term
hedging strategy is highly uncertain. None of the Portfolios intend to enter
into such forward contracts to protect the value of portfolio securities on a
continuous basis. The Portfolios will not enter into such forward contracts or
maintain a net exposure to such contracts where the consummation of the
contracts would obligate such Portfolio to deliver an amount of foreign
currency in excess of the value of such Portfolio's securities or other assets
denominated in that currency.
Under normal circumstances, consideration of the prospect for currency
parities will be incorporated into the long-term investment decisions made with
regard to overall diversification strategies. However, the management of the
Fund believes that it
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is important to have the flexibility to enter into such forward contracts when
it determines that the best interests of the performance of each Portfolio will
thereby be served. Except under circumstances where a segregated account is not
required under the 1940 Act or the rules adopted thereunder, the Fund's
Custodian will place cash, U.S. government securities, or high-grade debt
securities into a segregated account of a Portfolio in an amount equal to the
value of such Portfolio's total assets committed to the consummation of forward
currency exchange contracts. If the value of the securities placed in the
segregated account declines, additional cash or securities will be placed in the
account on a daily basis so that the value of the account will be equal to the
amount of such Portfolio's commitments with respect to such contracts.
The Portfolios generally will not enter into a forward contract with a term
of greater than one year. At the maturity of a forward contract, a Portfolio
may either sell the portfolio security and make delivery of the foreign
currency, or it may retain the security and terminate its contractual obligation
to deliver the foreign currency by purchasing an "offsetting" contract with the
same currency trader obligating it to purchase, on the same maturity date, the
same amount of the foreign currency.
It is impossible to forecast with absolute precision the market value of a
particular portfolio security at the expiration of the contract. Accordingly,
it may be necessary for a Portfolio to purchase additional foreign currency on
the spot market (and bear the expense of such purchase) if the market value of
the security is less than the amount of foreign currency that such Portfolio is
obligated to deliver and if a decision is made to sell the security and make
delivery of the foreign currency.
If a Portfolio retains the portfolio security and engages in an offsetting
transaction, such Portfolio will incur a gain or a loss (as described below) to
the extent that there has been movement in forward contract prices. Should
forward prices decline during the period between a Portfolio entering into a
forward contract for the sale of a foreign currency and the date it enters into
an offsetting contract for the purchase of the foreign currency, such Portfolio
will realize a gain to the extent that the price of the currency it has agreed
to sell exceeds the price of the currency it has agreed to purchase. Should
forward prices increase, such Portfolio would suffer a loss to the extent that
the price of the currency it has agreed to purchase exceeds the price of the
currency it has agreed to sell.
The Portfolios are not required to enter into such transactions with regard
to their foreign currency-denominated securities. It also should be realized
that this method of protecting the value of portfolio securities against a
decline in the value of a currency does not eliminate fluctuations in the
underlying prices of the securities. It simply establishes a rate of exchange
which one can achieve at some future point in time. Additionally, although such
contracts tend to minimize the risk of loss due to a decline in the value of the
hedged currency, at the same time, they tend to limit any potential gain which
might result should the value of such currency increase.
FUTURES CONTRACTS
The Equity Growth, Aggressive Equity, Value Equity, Balanced, Small Cap
Value Equity, Active Country Allocation, Gold, Latin American, U.S. Real Estate,
Emerging Markets, Emerging Markets Debt, International Magnum and China Growth
Portfolios may enter into futures contracts and options on futures contracts for
the purpose of remaining fully invested and reducing transactions costs. The
Fixed Income, Municipal Bond, Mortgage-Backed Securities, High Yield, Money
Market, Municipal Money Market, Active Country Allocation, Equity Growth,
Aggressive Equity, Gold, Latin American, U.S. Real Estate, Emerging Markets,
Emerging Markets Debt, International Magnum and China Growth Portfolios may also
enter into futures contracts for hedging purposes. No Portfolio will enter into
futures contracts or options thereon for speculative purposes. The Gold
Portfolio may also enter into futures contracts and options thereon on precious
metals. See "Precious Metals Forward and Futures Contracts and Options" below.
The China Growth and Latin American Portfolios may also enter into futures and
options thereon on stock and other securities indices and currencies. Futures
contracts provide for the future sale by one party and purchase by another party
of a specified amount of a specific security at a specified future time and at a
specified price. Futures contracts, which are standardized as to maturity date
and underlying financial instrument, are traded on national futures exchanges.
Futures exchanges and trading are regulated under the Commodity Exchange Act by
the Commodity Futures Trading Commission ("CFTC"), a U.S. government agency.
Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities or currencies, in most cases the
contracts are closed out before the settlement date without the making or taking
of delivery. Closing out an open futures position is done by taking an opposite
position ("buying" a contract which has previously been "sold" or "selling" a
contract previously "purchased") in an identical contract to terminate the
position. Brokerage commissions are incurred when a futures contract is bought
or sold.
Futures contracts on securities indices or other indices do not require the
physical delivery of securities, but merely provide for profits and losses
resulting from changes in the market value of a contract to be credited or
debited at the close of each trading
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day to the respective accounts of the parties to the contract. On the
contract's expiration date a final cash settlement occurs and the futures
position is simply closed out. Changes in the market value of a particular
futures contract reflect changes in the level of the index on which the futures
contract is based.
Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold for prices that
may range upward from less than 5% of the value of the contract being traded.
After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent
that the margin on deposit does not satisfy margin requirements, payment of an
additional "variation" margin will be required. Conversely, a change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. The
Portfolios expect to earn interest income on their margin deposits. With
respect to each long position in a futures contract or option thereon, the
underlying commodity value of such contract will always be covered by cash and
cash equivalents set aside plus accrued profits held at the futures commission
merchant.
The Portfolios may purchase and write call and put options on futures
contracts which are traded on a U.S. Exchange (and in the case of the China
Growth and Latin American Portfolios, on any recognized securities or futures
exchange to the extent permitted by the CFTC) and enter into closing
transactions with respect to such options to terminate an existing position. An
option on a futures contract gives the purchaser the right (in return for the
premium paid) to assume a position in a futures contract (a long position if the
option is a call and a short position if the option is a put) at a specified
exercise price at any time during the term of the option. Upon exercise of the
option, the delivery of the accumulated balance in the writer's futures margin
account, which represents the amount by which the market price of the futures
contract at the time of exercise exceeds, in the case of a call, or is less
than, in the case of a put, the exercise price of the option on the futures
contract.
The Portfolios will purchase and write options on futures contracts for
identical purposes to those set forth above for the purchase of a futures
contract (purchase of a call option or sale of a put option) and the sale of a
futures contract (purchase of a put option or sale of a call option), or to
close out a long or short position in futures contracts.
Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators." Hedgers use the futures markets primarily to offset
unfavorable changes in the value of securities otherwise held for investment
purposes or expected to be acquired by them. Speculators are less inclined to
own the underlying securities with futures contracts which they trade, and use
futures contracts with the expectation of realizing profits from market
fluctuations. The Portfolios intend to use futures contracts only for hedging
purposes.
Regulations of the CFTC applicable to the Portfolios require that all
futures transactions constitute bona fide hedging transactions except that a
Portfolio may engage in futures transactions that do not constitute bona fide
hedging to the extent that not more than 5% of the liquidation value of a
Portfolio's total assets are required as margin deposits or premiums for such
transactions. The Portfolios will only sell futures contracts to protect
securities owned against declines in price or purchase contracts to protect
against an increase in the price of securities intended for purchase. As
evidence of this hedging interest, the Portfolios expect that approximately 75%
of their futures contracts will be "completed"; that is, equivalent amounts of
related securities will have been purchased or are being purchased by the
Portfolios upon sale of open futures contracts.
Although techniques other than the sale and purchase of futures contracts
could be used to control the Portfolios' exposure to market fluctuations, the
use of futures contracts may be a more effective means of hedging this exposure.
While the Portfolios will incur commission expenses in both opening and closing
out futures positions, these costs are lower than transaction costs incurred in
the purchase and sale of the underlying securities.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS. None of the Portfolios will enter
into futures contract transactions to the extent that, immediately thereafter,
the sum of its initial margin deposits on open contracts exceeds 5% of the
market value of its total assets. In addition, none of the Portfolios will
enter into futures contracts to the extent that its outstanding obligations to
purchase securities under futures contracts and options on futures contracts
(and in the case of the Active Country Allocation, Equity Growth, Gold, Latin
American and China Growth Portfolios, under options, futures contracts and
options on futures contracts) would exceed 20% of its respective total assets.
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RISK FACTORS IN FUTURES TRANSACTIONS. Positions in futures contracts may be
closed out only on an exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contracts at any specific time. Thus, it may
not be possible to close a futures position. In the event of adverse price
movements, the Portfolios would continue to be required to make daily cash
payments to maintain their required margin. In such situations, if a Portfolio
has insufficient cash, it may have to sell portfolio securities to meet its
daily margin requirement at a time when it may be disadvantageous to do so. In
addition, a Portfolio may be required to make delivery of the instruments
underlying futures contracts it holds. The inability to close options and
futures positions also could have an adverse impact on the Portfolio's ability
to effectively hedge.
The Portfolios will minimize the risk that they will be unable to close out
a futures contract by only entering into futures which are traded on national
futures exchanges and for which there appears to be a liquid secondary market.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if, at the
time of purchase, 10% of the value of the futures contract is deposited as
margin, a subsequent 10% decrease in the value of the futures contract would
result in a total loss of the margin deposit, before any deduction for the
transaction costs, if the account were then closed out. A 15% decrease would
result in a loss equal to 150% of the original margin deposit if the contract
were closed out. Thus, a purchase or sale of a futures contract may result in
losses in excess of the amount invested in the contract. However, because the
Portfolios engage in futures strategies only for hedging purposes, the Adviser
does not believe that the Portfolios are subject to the risks of loss frequently
associated with futures transactions. A Portfolio would presumably have
sustained comparable losses if, instead of the futures contract, it had invested
in the underlying security or currency and sold it after the decline.
Utilization of futures transactions by the Portfolios does involve the risk
of imperfect or no correlation where the securities underlying futures contracts
have different maturities than the portfolio securities or currencies being
hedged. It is also possible that a Portfolio could both lose money on futures
contracts and also experience a decline in value of its portfolio securities.
There is also the risk of loss by a Portfolio of margin deposits in the event of
bankruptcy of a broker with whom the Portfolio has an open position in a futures
contract or related option.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and therefore does not limit
potential losses, because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of futures positions and subjecting some futures
traders to substantial losses.
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX
The investment objective of the Active Country Allocation Portfolio and the
International Magnum Portfolio is to provide long-term capital appreciation.
The Active Country Allocation Portfolio seeks to achieve its objective by
investing in equity securities of non-U.S. issuers which, in the aggregate,
replicate broad country indices, in accordance with country weightings
determined by the Adviser. The Adviser utilizes a top-down approach in
selecting investments for the Active Country Allocation Portfolio that
emphasizes country selection and weighting rather than individual stock
selection. The Active Country Allocation Portfolio invests, INTER ALIA, in
industrialized countries throughout the world that comprise the Morgan Stanley
Capital International EAFE (Europe, Australia and the Far East) Index (the "EAFE
Index"). The International Magnum Portfolio seeks to achieve its objective by
investing primarily in equity securities of non-U.S. issuers in accordance with
the EAFE country (defined below) weightings determined by the Adviser. After
establishing regional allocation strategies, the Adviser then selects equity
securities among issuers of a region. The International Magnum Portfolio
invests in countries comprising the EAFE Index (each an "EAFE country").
The EAFE Index is one of seven International Indices, twenty National
Indices and thirty-eight International Industry Indices making up the Morgan
Stanley Capital International Indices. The Morgan Stanley Capital
International EAFE Index is based on the share prices of 1,066 companies listed
on the stock exchanges of Europe, Australia, New Zealand and the Far East.
"Europe" includes Austria, Belgium, Denmark, Finland, France, Germany, Italy,
The Netherlands, Norway, Spain, Sweden, Switzerland and the United Kingdom.
"Far East" includes Japan, Hong Kong and Singapore/Malaysia.
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OPTIONS TRANSACTIONS
GENERAL INFORMATION. As stated in the applicable Prospectus, the Active Country
Allocation, Emerging Markets, Emerging Markets Debt, Equity Growth, Aggressive
Equity, Gold, Small Cap Value Equity, Value Equity, Balanced, Latin American,
U.S. Real Estate, International Magnum and China Growth Portfolios may purchase
and sell options on portfolio securities and the China Growth and Latin American
Portfolios also may purchase and sell options on securities indices. Additional
information with respect to option transactions is set forth below. Call and
put options on equity securities are listed on various U.S. and foreign
securities exchanges ("listed options") and are written in over-the-counter
transactions ("OTC Options").
Listed options are issued or guaranteed by the exchange on which they trade
or by a clearing corporation, such as Options Clearing Corporation ("OCC") in
the United States. Ownership of a listed call option gives the fund the right
to buy from the clearing corporation or exchange, the underlying security
covered by the option at the state exercise price (the price per unit of the
underlying security or currency) by filing an exercise notice prior to the
expiration date of the option. The writer (seller) of the option would then
have the obligation to sell to the clearing corporation or exchange, the
underlying security or currency at that exercise price prior to the expiration
date of the option, regardless of the current market price. Ownership of
listed put option would give the Portfolio the right to sell the underlying
security or currency to the clearing corporation or exchange at the state
exercise price. Upon notice of exercise of the put option, the writer of the
option would have the obligation to purchase the underlying security from the
clearing corporation or exchange at the exercise price.
OTC options are purchased from or sold (written) to dealers of financial
institutions which have entered into direct agreements with the Portfolio. With
OTC options, such variables as expiration date, exercise price and premium will
be agreed upon between the Portfolio and the transactions dealer, without the
intermediation of a third party such as a clearing corporation or exchange. If
the transacting dealer fails to make or take delivery of the securities
underlying an option it has written, in accordance with the terms of that
option, the Portfolio would lose the premium paid for the option as well as any
anticipated benefit of the transaction.
COVERED CALL WRITING. Each of the Portfolios may write (i.e., sell) covered
call options on portfolio securities. By doing so, the Portfolio would become
obligated during the terms of the option to deliver the securities underlying
the option should the option holder choose to exercise the option before the
option's termination date. In return for the call it has written, the Portfolio
will receive from the purchaser (or option holder) a premium which is the price
of the option, less a commission charged by a broker. The Portfolio will keep
the premium regardless of whether the option is exercised. A call option is
"covered" if the Portfolio owns the security underlying the option it has
written or has an absolute or immediate right to acquire the security by holding
a call option on such security, or maintains a sufficient amount of cash, cash
equivalents or liquid securities to purchase the underlying security. When the
Portfolio writes covered call options, it augments its income by the premiums
received and is thereby hedged to the extent of that amount against a decline in
the price of the underlying securities and the premiums received will offset a
portion of the potential loss incurred by the Portfolio if the securities
underlying the options are ultimately sold by the Portfolio at a loss. However,
during the option period, the Portfolio has, in return for the premium on the
option, given up the opportunity for capital appreciation above the exercise
price should the market price of the underlying security increase, but has
retained the risk of loss should the price of the underlying security decline.
The size of premiums will fluctuate with varying market conditions.
COVERED PUT WRITING. Each of the Portfolios may write covered put options on
portfolio securities. By doing so, the Portfolio incurs an obligation to buy
the security underlying the option from the purchaser of the put at the option's
exercise price at any time during the option period, at the purchaser's election
(certain listed and OTC options written by the Portfolio will be exercisable by
the purchaser only on a specific date). Generally, a put option is "covered" if
the Portfolio maintains cash, U.S. Government securities or other high grade
debt obligations equal to the exercise price of the option or if the Portfolio
holds a put option on the same underlying security with a similar or higher
exercise price.
Each of the Portfolios will write put options to receive the premiums paid
by purchasers; when the Adviser (and also the Sub-Adviser with respect to the
Gold Portfolio) wishes to purchase the security underlying the option at a price
lower than its current market price, in which case it will write the covered put
at an exercise price reflecting the lower purchase price sought; and to close
out long put option positions.
PURCHASE OF PUT AND CALL OPTIONS. Each of the Portfolios may purchase listed or
OTC put or call options on its portfolio securities in amounts exceeding no more
than 5% of its total assets. When the Portfolio purchases a call option it
acquires the right to purchase a designated security at a designated price (the
"exercise price"), and when the Portfolio purchases a put option it acquires the
right to sell a designated security at the exercise price, in each case on
or before a specified date (the "termination date"), usually not more than nine
months from the date the option is issued.
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The Portfolio may purchase call options to close out a covered call
position or to protect against an increase in the price of a security it
anticipates purchasing. The Portfolio may purchase put options on securities
which it holds in its portfolio only to protect itself against a decline in the
value of the security. If the value of the underlying security were to fall
below the exercise price of the put purchased in an amount greater than the
premium paid for the option, the Portfolio would incur no additional loss. The
Portfolio may also purchase put options to close out written put positions in a
manner similar to call option closing purchase transactions.
The amount the Portfolio pays to purchase an option is called a "premium",
and the risk assumed by the Portfolio when it purchases an option is the loss of
this premium. Because the price of an option tends to move with that of its
underlying security, if the Portfolio is to make a profit, the price of the
underlying security must change and the change must be sufficient to cover the
premium and commissions paid. A price change in the security underlying the
option does not assure a profit since prices in the options market may not
always reflect such a change.
OPTIONS ON SECURITIES INDICES. The China Growth and Latin American Portfolios
may purchase and write put and call options on securities indices and enter into
related closing transactions in order to hedge against the risk of market
price fluctuations or to increase income to the Portfolio.
Call and put options on indices are similar to options on securities except
that, rather than the right to purchase or sell particular securities at a
specified price, options on an index give the holder the right to receive, upon
exercise of the option, an amount of cash if the closing level of the underlying
index is greater than (or less than, in the case of puts) the exercise price of
the option. This amount of cash is equal to the difference between the closing
price of the index and the exercise price of the option, expressed in dollars
multiplied by a specified number. Thus, unlike options on individual
securities, all settlements are in cash, and gain or loss depends on price
movements in the particular market represented by the index generally (or in a
particular industry or segment of the market) rather than the price movements in
individual securities.
All options written on indices must be covered. When the Portfolio writes
an option on an index, it will establish a segregated account containing cash,
U.S. government securities or other high quality liquid debt securities with its
custodian in an amount at least equal to the market value of the option and will
maintain the account while the option is open or will otherwise cover the
transaction.
The Portfolio may choose to terminate an option position by entering into a
closing transaction. The ability of the Portfolio to enter into closing
transactions depends upon the existence of a liquid secondary market for such
transactions.
OPTIONS ON CURRENCIES. The China Growth and Latin American Portfolios may
purchase and write put and call options on foreign currencies (traded on U.S.
and foreign exchanges or over-the-counter markets) to manage the Portfolio's
exposure to changes in dollar exchange rates. Call options on foreign currency
written by the Portfolio will be "covered," which means that the Portfolio will
own an equal amount of the underlying foreign currency. With respect to put
options on foreign currency written by the Portfolio, the Portfolio will
establish a segregated account with the Fund's Custodian consisting of cash,
U.S. government securities or other high quality liquid debt securities in an
amount equal to the amount the Portfolio would be required to pay upon exercise
of the put.
PORTFOLIO TURNOVER
The portfolio turnover rate for a year is the lesser of the value of the
purchases or sales for the year divided by the average monthly market value of
the Portfolio for the year, excluding U.S. Government securities and securities
with maturities of one year or less. The portfolio turnover rate for a year is
calculated by dividing the lesser of sales or the average monthly value of the
Portfolio's portfolio purchases of portfolio securities during that year by
securities, excluding money market instruments. The rate of portfolio turnover
will not be a limiting factor when the Portfolio deems it appropriate to
purchase or sell securities for the Portfolio. However, the U.S. federal tax
requirement that the Portfolio derive less than 30% of its gross income from the
sale or disposition of securities held less than three months may limit the
Portfolio's ability to dispose of its securities. See "Taxes."
PRECIOUS METALS FORWARD AND FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
The Gold Portfolio may enter into futures contacts on precious ("precious
metals futures") metals as a hedge against changes in the prices of precious
metals held or intended to be acquired by the Portfolio, but not for speculation
or for achieving leverage. The Portfolio's hedging activities may include
purchases of futures contracts as an offset against the effect of anticipated
increases in the price of a precious metal which the Portfolio intends to
acquire ("anticipatory hedge") or sales of futures contracts as an offset
against the effect of anticipated declines in the price of precious metal which
the Portfolio owns ("hedge against an existing position").
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The Portfolio will enter into precious metals forward contracts which are
similar to precious metals futures contracts, in that they provide for the
purchase or sale of precious metals at an agreed price with delivery to take
place at an agreed future time. However, unlike futures contracts, forward
contracts are negotiated contracts which are primarily used in the dealer
market. Unlike the futures contract market, which is regulated by the CFTC and
by the regulations of the commodity exchanges, the forward contract market is
unregulated. The Portfolio will use forward contracts for the same hedging
purposes as those applicable to futures contracts, as described above. When the
Portfolio enters into a forward contract it will establish with the custodian a
segregated account consisting of cash, cash equivalents or bullion equal to the
market value of the forward contract purchased.
Precious metals futures and forward contract prices can be volatile and are
influenced principally by changes in spot market prices, which in turn are
affected by a variety of political and economic factors. In addition,
expectations of changing market conditions may at times influence the prices of
such futures and forward contracts, and changes in the cost of holding physical
precious metals, including storage, insurance and interest expense, will also
affect the relationship between spot and futures or forward prices. While the
correlation between changes in prices of futures and forward contracts and
prices of the precious metals being hedged by such contracts has historically
been very strong, the correlation may at times be imperfect and even a well
conceived hedge may be unsuccessful to some degree because of market behavior or
unexpected precious metals price trends. To the extent that interest rates move
in a direction opposite to that anticipated, the Portfolio may realize a loss on
a futures transaction not offset by an increase in the value of portfolio
securities. Moreover there is a possibility of a lack of a liquid secondary
market for closing out a futures position or futures option. The success of any
hedging technique depends upon the Adviser's and Sub-Adviser's accuracy in
predicting the direction of a market. If these predictions are incorrect, the
Portfolio may realize a loss.
The Portfolio may also purchase (buy) and write (sell) covered call or put
options on precious metals futures contracts. Such options would be purchased
solely for hedging purposes similar to those applicable to the purchase and sale
of futures contracts. Call options might be purchased to hedge against an
increase in the price of precious metals the Portfolio intends to acquire, and
put options may be purchased to hedge against a decline in the price of precious
metals owned by the Portfolio. As is the case with futures contracts, options
on precious metals futures may facilitate the Portfolio's acquisition of
precious metals or permit the Portfolio to defer disposition of precious metals
for tax or other purposes. The Portfolio may not purchase options on precious
metals and precious metals futures contracts if the premiums paid for all such
options, together with margin deposits on precious metals future contracts,
would exceed 5% of the Portfolio's total assets at the time the option is
purchased.
One of the risks which may arise in employing futures contracts to protect
against the price volatility of the Portfolio's assets is that the price of
precious metals subject to futures contracts (and thereby the futures contracts
prices) may correlate imperfectly with the prices of such assets. A correlation
may also be distorted by the fact that the futures market is dominated by short-
term traders seeking to profit from the difference between a contract or
security price objective and their cost of borrowed funds. Such distortions are
generally minor and would diminish as the contract approached maturity.
SECURITIES LENDING
Each Portfolio may lend its investment securities to qualified
institutional investors who need to borrow securities in order to complete
certain transactions, such as covering short sales, avoiding failures to deliver
securities or completing arbitrage operations. By lending its investment
securities, a Portfolio attempts to increase its net investment income through
the receipt of interest on the loan. Any gain or loss in the market price of
the securities loaned that might occur during the term of the loan would be for
the account of the Portfolio. Each Portfolio may lend its investment securities
to qualified brokers, dealers, domestic and foreign banks or other financial
institutions, so long as the terms, structure and the aggregate amount of such
loans are not inconsistent with the Investment Company Act of 1940, as amended
(the "1940 Act"), or the Rules and Regulations or interpretations of the
Securities and Exchange Commission (the "Commission") thereunder, which
currently require that (a) the borrower pledge and maintain with the portfolio
collateral consisting of cash, an irrevocable letter of credit issued by a
domestic U.S. bank, or securities issued or guaranteed by the United States
Government having a value at all times not less than 100% of the value of the
securities loaned, (b) the borrower add to such collateral whenever the price of
the securities loaned rises (i.e., the borrower "marks to the market" on a daily
basis), (c) the loan be made subject to termination by the Portfolio at any
time, and (d) the Portfolio receive reasonable interest on the loan (which may
include the Portfolio investing any cash collateral in interest bearing
short-term investments), any distributions on the loaned securities and any
increase in their market value. There may be risks of delay in recovery of the
securities or even loss of rights in the collateral should the borrower of the
securities fail financially. However, loans will only be made to borrowers
deemed by the Advisor to be of good standing and when, in the judgment of the
Advisor, the consideration which can be earned currently from such securities
loans justifies the attendant risk. All relevant facts and circumstances,
including the creditworthiness of the broker, dealer or institution, will be
considered in making decisions with respect to the lending of securities,
subject to review by the Board of Directors of the Fund.
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At the present time, the staff of the Commission does not object if an
investment company pays reasonable negotiated fees in connection with loaned
securities, so long as such fees are set forth in a written contract and
approved by the investment company's Board of Directors. In addition, voting
rights may pass with the loaned securities, but if a material event will occur
affecting an investment on loan, the loan must be called and the securities
voted.
SHORT SALES
The Emerging Markets Debt, Latin American and Aggressive Equity Portfolios
may from time to time sell securities short without limitation but consistent
with applicable legal requirements, although initially the Portfolio does not
intend to sell securities short. A short sale is a transaction in which the
Portfolio would sell securities it owns or has the right to acquire at no added
cost (i.e., "against the box") or does not own (but has borrowed) in
anticipation of a decline in the market price of the securities. When the
Portfolio makes a short sale of borrowed securities, the proceeds it receives
from the sale will be held on behalf of a broker until the Portfolio replaces
the borrowed securities. To deliver the securities to the buyer, the Portfolio
will need to arrange through a broker to borrow the securities and, in so doing,
the Portfolio will become obligated to replace the securities borrowed at their
market price at the time of replacement, whatever that price may be. The
Portfolio may have to pay a premium to borrow the securities and must pay any
dividends or interest payable on the securities until they are replaced.
The Portfolio's obligation to replace the securities borrowed in connection
with a short sale will be secured by collateral deposited with the broker that
consists of cash, U.S. Government Securities or other liquid, high grade debt
obligations. In addition, if the short sale is not "against the box," the
Portfolio will place in a segregated account with its custodian, or designated
sub-custodian, an amount of cash, U.S. Government Securities or other liquid
high grade debt obligations equal to the difference, if any, between (1) the
market value of the securities sold at the time they were sold short and (2) any
cash, U.S. Government Securities or other liquid high grade debt obligations
deposited as collateral with the broker in connection with the short sale (not
including the proceeds of the short sale). Until it replaces the borrowed
securities, the Portfolio will maintain the segregated account daily at a level
so that (1) the amount deposited in the account plus the amount deposited with
the broker (not including the proceeds from the short sale) will equal the
current market value of the securities sold short and (2) the amount deposited
in the account plus the amount deposited with the broker (not including the
proceeds from the short sale) will not be less than the market value of the
securities at the time they were sold short.
Short sales by the Portfolio involve certain risks and special
considerations. Possible losses from short sales differ from losses that could
be incurred from a purchase of a security, because losses from short sales may
be unlimited, whereas losses from purchases can equal only the total amount
invested.
SPECIAL RISKS ASSOCIATED WITH FORWARD CONTRACTS, FOREIGN CURRENCY FUTURES
CONTRACTS AND OPTIONS THEREON AND OPTIONS ON FOREIGN CURRENCIES
Transactions in forward contracts, as well as futures and options on
foreign currencies, are subject to the risk of governmental actions affecting
trading in or the prices of currencies underlying such contracts, which could
restrict or eliminate trading and could have a substantial adverse effect on the
value of positions held by the Portfolios permitted to engage in such hedging
transactions. In addition, the value of such positions could be adversely
affected by a number of other complex political and economic factors applicable
to the countries issuing the underlying currencies.
Furthermore, unlike trading in most other types of instruments, there is no
systematic reporting of last sale information with respect to the foreign
currencies underlying forward contracts, futures contracts and options. As a
result, the available information on which a Portfolio's trading systems will be
based may not be as complete as the comparable data on which such Portfolio
makes investment and trading decisions in connection with securities and other
transactions. Moreover, because the foreign currency market is a global,
twenty-four hour market, events could occur on that market which will not be
reflected in the forward, futures or options markets until the following day,
thereby preventing a Portfolio from responding to such events in a timely
manner.
Settlements of over-the-counter forward contracts or of the exercise of
foreign currency options generally must occur within the country issuing the
underlying currency, which in turn requires parties to such contracts to accept
or make delivery of such currencies in conformity with any United States or
foreign restrictions and regulations regarding the maintenance of foreign
banking relationships, fees, taxes or other charges.
Unlike currency futures contracts and exchange-traded options, options on
foreign currencies and forward contracts are not traded on contract markets
regulated by the CFTC or (with the exception of certain foreign currency
options) the Commission. In an over-the-counter trading environment, many of
the protections associated with transactions on exchanges will not be available.
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For example, there are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a period of time.
Although the purchaser of an option cannot lose more than the amount of the
premium plus related transaction costs, this entire amount could be lost.
Moreover, an option writer could lose amounts substantially in excess of its
initial investment due to the margin and collateral requirements associated with
such option positions. Similarly, there is no limit on the amount of potential
losses on forward contracts to which a Portfolio is a party.
In addition, over-the-counter transactions can only be entered into with a
financial institution willing to take the opposite side, as principal, of a
Portfolio's position unless the institution acts as broker and is able to find
another counterparty willing to enter into the transaction with such Portfolio.
Where no such counterparty is available, it will not be possible to enter into a
desired transaction. There also may be no liquid secondary market in the
trading of over-the-counter contracts, and a Portfolio may be unable to close
out options purchased or written, or forward contracts entered into, until their
exercise, expiration or maturity. This in turn could limit a Portfolio's
ability to realize profits or to reduce losses on open positions and could
result in greater losses.
Furthermore, over-the-counter transactions are not backed by the guarantee
of an exchange's clearing corporation. A Portfolio will therefore be subject to
the risk of default by, or the bankruptcy of, the financial institution serving
as its counterparty. One or more of such institutions also may decide to
discontinue its role as market-maker in a particular currency, thereby
restricting a Portfolio's ability to enter into desired hedging transactions. A
Portfolio will enter into over-the-counter transactions only with parties whose
creditworthiness has been reviewed and found satisfactory by the Adviser.
Over-the-counter options on foreign currencies, like exchange-traded
commodity futures contracts and commodity option contracts, are within the
exclusive regulatory jurisdiction of the CFTC. The CFTC currently permits the
trading of such options, but only subject to a number of conditions regarding
the commercial purpose of the purchaser of such options. The China Growth and
Latin American Portfolios are not able to determine at this time whether or to
what extent the CFTC may impose additional restrictions on the trading of over-
the-counter options on foreign currencies at some point in the future, or the
effect that any restrictions may have on the hedging strategies to be
implemented by the Portfolio. Forward contracts and currency swaps are not
presently subject to regulation by the CFTC, although the CFTC may in the future
assert or be granted authority to regulate such instruments. In such event, a
Portfolio's ability to utilize forward contracts and currency swaps in the
manner set forth above and in the applicable Prospectus could be restricted.
Options on foreign currencies traded on a national securities exchange are
within the jurisdiction of the Commission, as are other securities traded on
such exchanges. As a result, many of the protections provided to traders on
organized exchanges will be available with respect to such transactions. In
particular, all foreign currency options positions entered into on a national
securities exchange are cleared and guaranteed by the Options Clearing
Corporation ("OCC"), thereby reducing the risk of counterparty default.
Further, a liquid secondary market in options traded on a national securities
exchange may be more readily available than in the over-the-counter market,
potentially permitting a Portfolio to liquidate open positions at a profit prior
to exercise or expiration, or to limit losses in the event of adverse market
movements.
The purchase and sale of exchange-traded foreign currency options, however,
is subject to the risks of the availability of a liquid secondary market
described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effect of other
political and economic events. In addition, exchange-traded options on foreign
currencies involve certain risks not presented by the over-the-counter market.
For example, exercise and settlement of such options must be made exclusively
through the OCC, which has established banking relationships in applicable
foreign countries for this purpose. As a result, the OCC may, if it determines
that foreign governmental restrictions or taxes would prevent the orderly
settlement of foreign currency option exercises, or would result in undue
burdens on the OCC or its clearing member, impose special procedures for
exercise and settlement, such as technical changes in the mechanics of delivery
of currency, the fixing of dollar settlement prices or prohibitions on exercise.
TAXES
The following is only a summary of certain additional federal tax
considerations generally affecting the Fund and its shareholders that are not
described in the Prospectuses. No attempt is made to present a detailed
explanation of the federal, state or local tax treatment of the Fund or its
shareholders, and the discussion here and in the Fund's Prospectuses is not
intended as a substitute for careful tax planning.
The following discussion of federal income tax consequences is based on the
Internal Revenue Code of 1986, as amended (the "Code") and the regulations
issued thereunder as in effect on the date of this Statement of Additional
Information. New
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legislation, as well as administrative changes or court decisions, may
significantly change the conclusions expressed herein, and may have a
retroactive effect with respect to the transactions contemplated herein.
Each Portfolio within the Fund is generally treated as a separate
corporation for federal income tax purposes, and thus the provisions of the Code
generally will be applied to each Portfolio separately, rather than to the Fund
as a whole.
Each Portfolio intends to qualify and elect to be treated for each taxable
year as a regulated investment company ("RIC") under Subchapter M of the Code.
Accordingly, each Portfolio must, among other things, (a) derive at least 90% of
its gross income each taxable year from dividends, interest, payments with
respect to securities loans, gains from the sale or other disposition of stock,
securities or foreign currencies, and certain other related income, including,
generally, certain gains from options, futures and forward contracts; (b) derive
less than 30% of its gross income each taxable year from the sale or other
disposition of the following items if held less than three months (A) stock or
securities, (B) options, futures or forward contracts (other than options,
futures or forward contracts on foreign currencies), and (C) foreign currencies
(or options, futures, or forward contracts on foreign currencies) that are not
directly related to the Portfolio's principal business of investing in stocks or
securities (or options or futures with respect to stock or securities) (the
"short-short test") and (c) diversify its holdings so that, at the end of each
fiscal quarter of the Portfolio's taxable year, (i) at least 50% of the market
value of the Portfolio's total assets is represented by cash and cash items,
United States Government securities, securities of other RICs, and other
securities, with such other securities limited, in respect to any one issuer, to
an amount not greater than 5% of the value of the Portfolio's total assets or
10% of the outstanding voting securities of such issuer, and (ii) not more than
25% of the value of its total assets is invested in the securities (other than
United States Government securities or securities of other RICs) of any one
issuer or two or more issuers which the Portfolio controls and which are engaged
in the same, similar, or related trades or business. For purposes of the 90% of
gross income requirement described above, foreign currency gains which are not
directly related to a Portfolio's principal business of investing in stock or
securities (or options or futures with respect to stock or securities) may be
excluded from income that qualifies under the 90% requirement.
In addition to the requirements described above, in order to qualify as a
RIC, a Portfolio must distribute at least 90% of its net investment income
(which generally includes dividends, taxable interest, and the excess of net
short-term capital gains over net long-term capital losses less operating
expenses) and at least 90% of its net tax-exempt interest income, if any, to
shareholders. If a Portfolio meets all of the RIC requirements, it will not be
subject to federal income tax on any of its net investment income or capital
gains that it distributes to shareholders.
If a Portfolio fails to qualify as a RIC for any year, all of its income
will be subject to tax at corporate rates, and its distributions (including
capital gains distributions) will be taxable as ordinary income dividends to its
shareholders to the extent of the Portfolio's current and accumulated earnings
and profits, and will be eligible for the corporate dividends received deduction
for corporate shareholders.
Each Portfolio will decide whether to distribute or to retain all or part
of any net capital gains (the excess of net long-term capital gains over net
short-term capital losses) in any year for reinvestment. If any such gains are
retained, the Portfolio will pay federal income tax thereon, and, if the
Portfolio makes an election, the shareholders will include such undistributed
gains in their income, will increase their basis in Portfolio shares by 65% of
the amount included in their income and will be able to claim their share of the
tax paid by the Portfolio as a refundable credit against their federal income
tax liability.
A gain or loss realized by a shareholder on the sale, exchange or
redemption of shares of a Portfolio held as a capital asset will be capital
gain or loss, and such gain or loss will be long-term if the holding period
for the shares exceeds one year, and otherwise will be short-term. Any loss
realized on a sale, exchange or redemption of shares of a Portfolio will be
disallowed to the extent the shares disposed of are replaced within the
61-day period beginning 30 days before and ending 30 days after the shares
are disposed of. Any loss realized by a shareholder on the disposition of
shares held 6 months or less is treated as a long-term capital loss to the
extent of any distributions of net long-term capital gains received by the
shareholder with respect to such shares or any inclusion of undistributed
capital gain with respect to such shares.
The conversion of Class A shares to Class B shares should not be a taxable
event to the shareholder.
Each Portfolio will generally be subject to a nondeductible 4% federal
excise tax to the extent it fails to distribute by the end of any calendar year
at least 98% of its ordinary income for that year and 98% of its capital gain
net income (the excess of short- and long-term capital gains over short- and
long-term capital losses) for the one-year period ending on October 31 of that
year, plus certain other amounts.
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Each Portfolio is required by federal law to withhold 31% of reportable
payments (which may include dividends, capital gains distributions, and
redemptions) paid to shareholders who have not certified on the Account
Registration Form or on a separate form supplied by the Portfolio, that the
Social Security or Taxpayer Identification Number provided is correct and that
the shareholder is exempt from backup withholding or is not currently subject to
backup withholding.
For certain transactions, each Portfolio is required for federal income tax
purposes to recognize as gain or loss its net unrealized gains and losses on
forward currency and futures contracts as of the end of each taxable year, as
well as those actually realized during the year. In most cases, any such gain
or loss recognized with respect to a regulated futures contract is considered to
be 60% long-term capital gain or loss and 40% short-term capital gain or loss,
without regard to the holding period of the contract. Realized gain or loss
attributable to a foreign currency forward contract is treated as 100% ordinary
income. Furthermore, foreign currency futures contracts which are intended to
hedge against a change in the value of securities held by a Portfolio may affect
the holding period of such securities and, consequently, the nature of the gain
or loss on such securities upon disposition.
As discussed above, in order for each Portfolio to continue to qualify for
federal income tax treatment as a RIC, at least 90% of its gross income for a
taxable year must be derived from certain qualifying income, including
dividends, interest, income derived from loans of securities, and gains from the
sale or other disposition of stock, securities or foreign currencies, or other
related income, including gains from options, futures and forward contracts,
derived with respect to its business of investing in stock, securities or
currencies. Any net gain realized from the closing out of futures contracts
will therefore generally be qualifying income for purposes of the 90%
requirement. Qualification as a RIC also requires that less than 30% of a
Portfolio's gross income be derived from the sale or other disposition of stock,
securities, options, futures or forward contracts (including certain foreign
currencies not directly related to the Fund's business of investing in stock or
securities) held less than three months. In order to avoid realizing excessive
gains on futures contracts held less than three months, the Portfolio may be
required to defer the closing out of futures contracts beyond the time when it
would otherwise be advantageous to do so.
Short sales engaged in by a Portfolio may reduce the holding property held
by a Portfolio which is substantially identical to the property sold short.
This rule may make it more difficult for the Portfolio to satisfy the short-
short test. This rule may also have the effect of converting capital gains
recognized by the Portfolio from long-term to short-term as well as converting
capital losses recognized by the Portfolio from short-term to long-term.
SPECIAL RULES FOR CERTAIN FOREIGN CURRENCY TRANSACTIONS. In general,
gains from foreign currencies and from foreign currency options, foreign
currency futures and forward foreign exchange contracts relating to
investments in stock, securities or foreign currencies are currently
considered to be qualifying income for purposes of determining whether the
Fund qualifies as a regulated investment company. It is currently unclear,
however, who will be treated as the issuer of certain foreign currency
instruments or how foreign currency options, futures, or forward foreign
currency contracts will be valued for purposes of the regulated investment
company diversification requirements applicable to the Fund. The Fund may
request a private letter ruling from the Internal Revenue Service on some or
all of these issues.
Under Code Section 988, special rules are provided for certain
transactions in a foreign currency other than the taxpayer's functional
currency (i.e., unless certain special rules apply, currencies other than the
U.S. dollar). In general, foreign currency gains or losses from forward
contracts, from futures contracts that are not "regulated futures contracts",
and from unlisted options will be treated as ordinary income or loss under
Code Section 988. Also, certain foreign exchange gains or losses derived with
respect to foreign fixed-income securities are also subject to Section 988
treatment. In general, therefore, Code Section 988 gains or losses will
increase or decrease the amount of the Fund's investment company taxable
income available to be distributed to shareholders as ordinary income, rather
than increasing or decreasing the amount of the Fund's net capital gain.
If the Fund invests in an entity which is classified as a "passive
foreign investment company" ("PFIC") for U.S. tax purposes, the application
of certain technical tax provisions applying to such companies could result
in the imposition of federal income tax with respect to such investments at
the Fund level which could not be eliminated by distributions to
shareholders. The U.S. Treasury issued proposed regulation section 1.1291-8
which establishes a mark-to-market regime which allows investment companies
investing in PFIC's to avoid most, if not all, of the difficulties posed by
the PFIC rules. In any event, it is not anticipated that any taxes on the
Fund with respect to investments in PFIC's would be significant.
A Fund's investment in options, swaps and related transactions, futures
contracts and forward contracts, options on futures contracts and stock
indices and certain other securities, including transactions involving actual
or deemed short sales or foreign exchange gains or losses are subject to many
complex and special tax rules. For example, over-the-counter options on debt
securities and equity options, including options on stock and on narrow-based
stock indexes, will be subject to tax under Section 1234 of the Code,
generally producing a long-term or short-term capital gain or loss upon
exercise, lapse or closing out of the option or sale of the underlying stock
or security. By contrast, a Fund's treatment of certain other options,
futures and forward contracts entered into by a Fund is generally governed by
Section 1256 of the Code. These "Section 1256" positions generally include
listed options on debt securities, options on broad-based stock indexes,
options on securities indexes, options on futures contracts, regulated
futures contracts and certain foreign currency contracts and options thereon.
A Section 1256 position held by a Fund will generally be marked-to-market
(i.e. treated as if it were sold for fair market value) on the last business
day of a Fund's fiscal year, and all gain or loss associated with fiscal year
transactions and mark-to-market positions at fiscal year end (except certain
currency gain or loss covered by Section 988 of the Code) will generally be
treated as 60% long-term capital gain or loss and 40% short-term capital gain
or loss. The effect of Section 1256 mark-to-market rules may be to accelerate
income or to convert what otherwise would have been long-term capital gains
into short-term capital gains or short-term capital losses into long-term
capital losses within a Fund. The acceleration of income on Section 1256
positions may require a Fund to accrue taxable income without the
corresponding receipt of cash. In order to generate cash to satisfy the
distribution requirements of the Code, a Fund may be required to dispose of
portfolio securities that they otherwise would have continued to hold or to
use cash flows from other sources such as the sale of Fund shares. In these
ways, any or all of these rules may affect the amount, character and timing
of income earned and in turn distributed to shareholders by a Fund.
When a Fund holds options or contracts which substantially diminish
their risk of loss with respect to other positions (as might occur in some
hedging transactions), this combination of positions could be treated as a
"straddle" for tax purposes, resulting in possible deferral of losses,
adjustments in the holding periods of Fund securities and conversion of
short-term capital losses into long-term capital losses. Certain tax
elections exist for mixed straddles i.e., straddles comprised of at least one
Section 1256 position and at least one non-Section 1256 position which may
reduce or eliminate the operation of these straddle rules.
SPECIAL TAX CONSIDERATIONS RELATING TO
MUNICIPAL BOND AND
MUNICIPAL MONEY MARKET PORTFOLIOS
Each of the Municipal Bond Portfolio and the Municipal Money Market
Portfolio will qualify to pay "exempt interest dividends" to its shareholders
provided that, at the close of each quarter of its taxable year at least 50% of
the value of its total assets consists of obligations the interest on which is
exempt from federal income tax. Current federal tax law limits the types and
volume of bonds qualifying for federal income tax exemption of interest, which
may have an effect on the ability of these Portfolios to purchase sufficient
amounts of tax-exempt securities to satisfy this requirement. Any loss on the
sale or exchange of shares of the Municipal Bond Portfolio or the Municipal
Money Market Portfolio held for six months or less will be disallowed to the
extent of any exempt-interest dividends received by the selling shareholder with
respect to such shares.
As noted in the Prospectus for the Municipal Bond Portfolio and the
Municipal Money Market Portfolio, exempt-interest dividends are excludable from
a shareholder's gross income for regular Federal income tax purposes. Exempt-
interest dividends may nevertheless be subject to the alternative minimum tax
(the "Alternative Minimum Tax") imposed by Section 55 of the Code or the
environmental tax (the "Environmental Tax") imposed by Section 59A of the Code.
The Alternative Minimum Tax is imposed at the rate of up to 28% in the case of
non-corporate taxpayers and at the rate of 20% in the case of corporate
taxpayers, to the extent it exceeds the taxpayer's regular tax liability. The
Environmental Tax is imposed at the rate of 0.12% and applies only to corporate
taxpayers. The Alternative Minimum Tax and the Environmental Tax may be
affected by the receipt of exempt-interest dividends in two circumstances.
First, exempt-interest dividends derived from certain "private activity bonds"
issued after August 7, 1986, will generally be an item of tax preference and
therefore potentially subject to the Alternative Minimum Tax and the
Environmental Tax. The Portfolios intend, when possible, to avoid investing in
private activity bonds. Second, in the case of exempt-interest dividends
received by corporate shareholders, all exempt-interest dividends, regardless of
when the bonds from which they are derived were issued or whether they are
derived from private activity bonds, will be included in the corporation's
"adjusted current earnings," as defined in Section 56(g) of the Code, in
calculating the corporation's alternative minimum taxable income for purposes of
determining the Alternative Minimum Tax and the Environmental Tax.
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The percentage of income that constitutes "exempt-interest dividends" will
be determined for each year for the Municipal Bond Portfolio and the Municipal
Money Market Portfolio and will be applied uniformly to all dividends declared
with respect to the Portfolios during that year. This percentage may differ
from the actual percentage for any particular day.
Interest on indebtedness incurred or continued by shareholders to purchase
or carry shares of the Municipal Bond Portfolio or the Municipal Money Market
Portfolio will not be deductible for federal income tax purposes. The deduction
otherwise allowable to property and casualty insurance companies for "losses
incurred" will be reduced by an amount equal to a portion of exempt-interest
dividends received or accrued during any taxable year. Foreign corporations
engaged in a trade or business in the United States will be subject to a "branch
profits tax" on their "dividend equivalent amount" for the taxable year, which
will include exempt-interest dividends. Certain Subchapter S corporations may
also be subject to taxes on their "passive investment income," which could
include exempt-interest dividends. Up to 85% of the Social Security benefits or
railroad retirement benefits received by an individual during any taxable year
will be included in the gross income of such individual if the individual's
"modified adjusted gross income" (which includes exempt-interest dividends) plus
one-half of the Social Security benefits or railroad retirement benefits
received by such individual during that taxable year exceeds the base amount
described in Section 86 of the Code.
Entities or persons who are "substantial users" (or persons related to
"substantial users") of facilities financed by industrial development bonds or
private activity bonds should consult their tax advisors before purchasing
shares of the Municipal Bond Portfolio or the Municipal Money Market Portfolio.
"Substantial user" is defined generally for these purposes as including a "non-
exempt person" who regularly uses in trade or business a part of a facility
financed from the proceeds of such bonds.
Issuers of bonds purchased by the Municipal Bond Portfolio (or the
beneficiary of such bonds) may have made certain representations or covenants in
connection with the issuance of such bonds to satisfy certain requirements of
the Code that must be satisfied subsequent to the issuance of such bonds.
Investors should be aware that exempt-interest dividends derived from such bonds
may become subject to federal income taxation retroactively to the date thereof
if such representations are determined to have been inaccurate or if the issuer
of such bonds (or the beneficiary of such bonds) fails to comply with such
covenants.
SPECIAL TAX CONSIDERATIONS RELATING TO FOREIGN INVESTMENTS
Gains or losses attributable to foreign currency contracts, or to
fluctuations in exchange rates that occur between the time a Portfolio accrues
interest or other receivables or accrues expenses or other liabilities
denominated in a foreign currency and the time the Portfolio actually collects
such receivables or pays such liabilities are treated as ordinary income or
ordinary loss to the Portfolio. Similarly, gains or losses on disposition of
debt securities denominated in a foreign currency attributable to fluctuations
in the value of the foreign currency between the date of acquisition of the
security and the date of disposition also are treated as ordinary gain or loss
to the Portfolio. These gains or losses increase or decrease the amount of a
Portfolio's net investment income available to be distributed to its
shareholders as ordinary income.
It is expected that each Portfolio will be subject to foreign withholding
taxes with respect to its dividend and interest income from foreign countries,
and a Portfolio may be subject to foreign income taxes with respect to other
income. So long as more than 50% in value of a Portfolio's total assets at the
close of the taxable year consists of stock or securities of foreign
corporations, the Portfolio may elect to treat certain foreign income taxes
imposed on it for United States federal income tax purposes as paid directly by
its shareholders. A Portfolio will make such an election only if it deems it to
be in the best interest of its shareholders and will notify shareholders in
writing each year if it makes an election and of the amount of foreign income
taxes, if any, to be treated as paid by the shareholders. If a Portfolio makes
the election, shareholders will be required to include in income their
proportionate shares of the amount of foreign income taxes treated as imposed on
the Portfolio and will be entitled to claim either a credit (subject to the
limitations discussed below) or, if they itemize deductions, a deduction, for
their shares of the foreign income taxes in computing their federal income tax
liability.
Shareholders who choose to utilize a credit (rather than a deduction) for
foreign taxes will be subject to a number of complex limitations regarding the
availability and utilization of the credit. Because of these limitations,
shareholders may be unable to claim a credit for the full amount of their
proportionate shares of the foreign income taxes paid by a Portfolio.
Shareholders are urged to consult their tax advisors regarding the application
of these rules to their particular circumstances.
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TAXES AND FOREIGN SHAREHOLDERS
Taxation of a shareholder who, as to the United States, is a nonresident
alien individual, a foreign trust or estate, a foreign corporation, or a foreign
partnership ("Foreign Shareholder") depends on whether the income from the
Portfolio is "effectively connected" with a U.S. trade or business carried on by
such shareholder.
If the income from the Portfolio is not effectively connected with a U.S.
trade or business carried on by a Foreign Shareholder, distributions of net
investment income plus the excess of net short-term capital gains over net
long-term capital losses will be subject to U.S. withholding tax at the rate of
30% (or such lower treaty rate as may be applicable) upon the gross amount of
the dividend. Furthermore, Foreign Shareholders will generally be exempt from
U.S. federal income tax on gains realized on the sale of shares of the
Portfolio, distributions of net long-term capital gains, and amounts retained by
the Fund which are designated as undistributed capital gains.
If the income from the Portfolio is effectively connected with a U.S. trade
or business carried on by a Foreign Shareholder, then distributions from the
Portfolio and any gains realized upon the sale of shares of the Portfolio, will
be subject to U.S. federal income tax at the rates applicable to U.S. citizens
and residents or domestic corporations.
The Portfolio may be required to withhold U.S. federal income tax on
distributions that are otherwise exempt from withholding tax (or taxable at a
reduced treaty rate) unless the Foreign Shareholder complies with Internal
Revenue Service certification requirements.
The tax consequences to a Foreign Shareholder entitled to claim the
benefits of an applicable tax treaty may differ from those described here.
Furthermore, Foreign Shareholders are strongly urged to consult their own tax
advisors with respect to the particular tax consequences to them of an
investment in a Portfolio, including the potential application of the provisions
of the Foreign Investment in Real Estate Property Tax Act of 1980, as amended.
PURCHASE OF SHARES
The purchase price of the Class A shares of each Portfolio of the Fund,
except the Money Market and Municipal Money Market Portfolios, and the Class B
shares of each Multiclass Portfolio of the Fund is the net asset value next
determined after the order is received. For each Portfolio of the Fund other
then the Money Market or Municipal Market Portfolios, an order received prior to
the regular close of the New York Stock Exchange (the "NYSE") will be executed
at the price computed on the date of receipt; and an order received after the
regular close of the NYSE will be executed at the price computed on the next day
the NYSE is open as long as the Fund's transfer agent receives payment by check
or in Federal Funds prior to the regular close of the NYSE on such day. Shares
of the Money Market and Municipal Money Market Portfolios may be purchased at
the net asset value per share at the price next determined after Federal Funds
are available to such Portfolios. Shares of the Fund may be purchased on any
day the NYSE is open. The NYSE will be closed on the following days: New
Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day.
Each Portfolio reserves the right in its sole discretion (i) to suspend the
offering of its shares, (ii) to reject purchase orders when in the judgment of
management such rejection is in the best interest of the Fund, and (iii) to
reduce or waive the minimum for initial and subsequent investments for certain
fiduciary accounts such as employee benefit plans or under circumstances where
certain economies can be achieved in sales of a Portfolio's shares. The
International Equity Portfolio is currently limiting investments in the
Portfolio to: (i) reinvested dividends and distributions by existing
shareholders of the Portfolio; (ii) additional investments by existing
shareholders of the Portfolio; (iii) investments by employees of Morgan Stanley;
and (iv) investors who were in the process of becoming shareholders of the
Portfolio at the time the Portfolio limited further investments.
REDEMPTION OF SHARES
Each Portfolio may suspend redemption privileges or postpone the date of
payment (i) during any period that the NYSE is closed, or trading on the NYSE is
restricted as determined by the Commission, (ii) during any period when an
emergency exists as defined by the rules of the Commission as a result of which
it is not reasonably practicable for a Portfolio to dispose of securities owned
by it, or fairly to determine the value of its assets, and (iii) for such other
periods as the Commission may permit.
16
<PAGE>
No charge is made by any Portfolio for redemptions except for the 1%
transaction fee assessed upon redemption of the International Small Cap
Portfolio. Any redemption may be more or less than the shareholder's cost
depending on the market value of the securities held by the Portfolio.
To protect your account and the Fund from fraud, signature guarantees are
required for certain redemptions. Signature guarantees enable the Fund to
verify the identity of the person who has authorized a redemption from your
account. Signature guarantees are required in connection with: (1) all
redemptions, regardless of the amount involved, when the proceeds are to be paid
to someone other than the registered owner(s) and/or registered address; and
(2) share transfer requests.
A guarantor must be a bank, a trust company, a member firm of a domestic
stock exchange, or a foreign branch of any of the foregoing. Notaries public
are not acceptable guarantors.
The signature guarantees must appear either: (1) on the written request
for redemption; (2) on a separate instrument for assignment ("stock power")
which should specify the total number of shares to be redeemed; or (3) on all
stock certificates tendered for redemption and, if shares held by the Fund are
also being redeemed, on the letter or stock power.
SHAREHOLDER SERVICES
EXCHANGE FEATURES
Shares of each Portfolio of the Fund may be exchanged for shares of any
other available Portfolio (other than the International Equity Portfolio, which
is closed to new investors). In exchanging for shares of a Portfolio with more
than one class, the class of shares a shareholder receives in exchange will be
determined in the same manner as any other purchase of shares and will not be
based on the class of shares surrendered for the exchange. Consequently, the
same minimum initial investment and minimum account size for determining the
class of shares received in the exchange will apply.
Any such exchange will be based on the respective net asset values of the
shares involved. There is no sales commission or charge of any kind. Before
making an exchange, a shareholder should consider the investment objectives of
the Portfolio to be purchased.
Exchange requests may be made either by mail or telephone. Exchange
requests by mail should be sent to Morgan Stanley Institutional Fund, Inc., P.O.
Box 2798, Boston, Massachusetts 02208-2798. Telephone exchanges will be accepted
only if the certificates for the shares to be exchanged are held by the Fund for
the account of the shareholder and the registration of the two accounts will be
identical. Requests for exchanges received prior to 10:00 a.m. (Eastern Time)
for the Municipal Money Market Portfolio, 11:00 a.m. (Eastern Time) for the
Money Market Portfolio, and 4:00 p.m. (Eastern Time) for the remaining
Portfolios will be processed as of the close of business on the same day.
Requests received after these times will be processed on the next business day.
Exchanges may be subject to limitations as to amounts or frequency, and to other
restrictions established by the Board of Directors to assure that such exchanges
do not disadvantage the Fund and its shareholders.
For federal income tax purposes an exchange between Portfolios is a taxable
event for shareholders subject to tax, and, accordingly, a gain or loss may be
realized. The exchange privilege may be modified or terminated by the Fund at
any time upon 60-days' notice to shareholders.
TRANSFER OF SHARES
Shareholders may transfer shares of the Fund's Portfolios to another person
by making a written request to the Fund. The request should clearly identify
the account and number of shares to be transferred, and include the signature of
all registered owners and all stock certificates, if any, which are subject to
the transfer. The signature on the letter of request, the stock certificate or
any stock power must be guaranteed in the same manner as described under
"Redemption of Shares." As in the case of redemptions, the written request must
be received in good order before any transfer can be made. Transferring shares
may affect the eligibility of an account for a given class of the Portfolio's
shares and may result in involuntary conversion or redemption of such shares.
17
<PAGE>
INVESTMENT LIMITATIONS
Each current Portfolio has adopted the following restrictions which are
fundamental policies and may not be changed without the approval of the lesser
of: (1) at least 67% of the voting securities of the Portfolio present at a
meeting if the holders of more than 50% of the outstanding voting securities of
the Portfolio are present or represented by proxy, or (2) more than 50% of the
outstanding voting securities of the Portfolio. Each Portfolio of the Fund will
not:
(1) purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (except this shall not prevent the
Portfolio from purchasing or selling options or futures contracts or from
investing in securities or other instruments backed by physical commodities),
and except that the Gold Portfolio may invest in gold bullion in accordance with
its investment objectives and policies;
(2) purchase or sell real estate, although it may purchase and sell
securities of companies that deal in real estate and may purchase and sell
securities that are secured by interests in real estate;
(3) lend any security or make any other loan if, as a result, more than
33 1/3% of its total assets would be lent to other parties, but this limitation
does not apply to purchases of debt securities or repurchase agreements;
(4) except with respect to the Global Fixed Income, Emerging Markets,
Emerging Markets Debt, China Growth, Latin American, MicroCap, Aggressive
Equity, U.S. Real Estate Portfolios (i) purchase more than 10% of any class of
the outstanding voting securities of any issuer and (ii) purchase securities of
an issuer (except obligations of the U.S. Government and its agencies and
instrumentalities) if as a result, with respect to 75% of its total assets, more
than 5% of the Portfolio's total assets, at market value, would be invested in
the securities of such issuer;
(5) issue senior securities and will not borrow, except from banks and as
a temporary measure for extraordinary or emergency purposes and then, in no
event, in excess of 33 1/3% of its total assets (including the amount borrowed)
less liabilities (other than borrowings), except that each of the Emerging
Markets Debt and Latin American Portfolios may borrow from banks and other
entities in amount not in excess of 33 1/3% of its total assets (including the
amount borrowed) less liabilities in accordance with its investment objectives
and policies;
(6) underwrite securities issued by others, except to the extent that the
Portfolio may be considered an underwriter within the meaning of the 1933 Act in
the disposition of restricted securities;
(7) acquire any securities of companies within one industry if, as a
result of such acquisition, more than 25% of the value of the Portfolio's total
assets would be invested in securities of companies within such industry;
provided, however, that there shall be no limitation on the purchase of
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, or (in the case of the Money Market Portfolio or the
Municipal Money Market Portfolio) instruments issued by U.S. Banks, except that
the Latin American Portfolio may invest more than 25% of its total assets in
companies involved in the telecommunications industry or financial services
industry, and except that the U.S. Real Estate Portfolio may invest more than
25% of its total assets in the U.S. real estate industry, respectively, as
provided in their respective Prospectuses; and
(8) write or acquire options or interests in oil, gas or other mineral
exploration or development programs.
In addition, each current Portfolio of the Fund has adopted non-fundamental
investment limitations as stated below and in their respective Prospectuses.
Such limitations may be changed without shareholder approval. Each current
Portfolio of the Fund will not:
(1) purchase on margin or sell short, except (i) that the Emerging Markets
Debt, Latin American and Aggressive Equity Portfolios may from time to time sell
securities short without limitation but consistent with applicable legal
requirements as stated in its Prospectus, (ii) that each of the Active Country
Allocation, Equity Growth, Gold, China Growth and Aggressive Equity Portfolios
may enter into option transactions to the extent that not more than 5% of the
Portfolio's total assets are required as deposits to secure obligations under
options and not more than 20% of its total assets are invested in options,
futures contracts and options on futures contracts at any time, and (iii) as
specified above in Fundamental Restriction No. (1);
(2) purchase or retain securities of an issuer if those Officers and
Directors of the Fund or its investment adviser owning more than 1/2 of 1% of
such securities together own more than 5% of such securities;
18
<PAGE>
(3) pledge, mortgage, or hypothecate any of its assets to an extent
greater than 10% of its total assets at fair market value;
(4) invest for the purpose of exercising control over management of any
company;
(5) invest its assets in securities of any investment company, except by
purchase in the open market involving only customary brokers' commissions or in
connection with mergers, acquisitions of assets or consolidations and except as
may otherwise be permitted by the 1940 Act;
(6) invest more than 5% of its total assets in securities of companies
which have (with predecessors) a record of less than three years' continuous
operation;
(7) purchase warrants if, by reason of such purchase, more than 5% of the
value of the Portfolio's net assets (taken at market value) would be invested in
warrants, valued at the lower of cost or market. Included within this amount,
but not to exceed 2% of the value of the Portfolio's net assets, may be warrants
that are not listed on a recognized stock exchange;
(8) except for the U.S. Real Estate Portfolio, invest in real estate
limited partnership interests, and the U.S. Real Estate Portfolio may not invest
in such interests that are not publicly traded;
(9) make loans except (i) by purchasing bonds, debentures or similar
obligations (including repurchase agreements, subject to the limitations as
described in the respective Prospectuses) that are publicly distributed, and
(ii) by lending its portfolio securities to banks, brokers, dealers and other
financial institutions so long as such loans are not inconsistent with the 1940
Act or the Rules and Regulations or interpretations of the Commission
thereunder;
(10) invest in oil, gas or other mineral leases; and
(11) purchase puts, calls, straddles, spreads and any combination thereof
if for any reason thereof the value of its aggregate investment in such classes
of securities will exceed 5% of their respective total assets, except that each
of the Active Country Allocation, Equity Growth, Gold, China Growth and
Aggressive Equity Portfolios may enter into option transactions to the extent
that not more than 5% of the Portfolio's total assets are required as deposits
to secure obligations under options and not more than 20% of its total assets
are invested in options, futures contracts and options on futures contracts at
any time.
The Balanced, Fixed Income and Value Equity Portfolios will only issue
shares for securities or assets other than cash in a bona fide reorganization,
statutory merger, or in other acquisitions of portfolio securities (except for
municipal debt securities issued by state political subdivisions or their
agencies or instrumentalities) which (i) meet their respective investment
objectives; (ii) are acquired for investment and not for resale.
Each of the Global Fixed Income, Emerging Markets, Emerging Markets Debt,
China Growth, Latin American, Aggressive Equity and U.S. Real Estate Portfolios
will diversify its holdings so that, at the close of each quarter of its taxable
year, (i) at least 50% of the market value of the Portfolio's total assets is
represented by cash (including cash items and receivables), U.S. Government
securities, and other securities, with such other securities limited, in respect
of any one issuer, for purposes of this calculation to an amount not greater
than 5% of the value of the Portfolio's total assets and 10% of the outstanding
voting securities of such issuer, and (ii) not more than 25% of the value of its
total assets is invested in the securities of any one issuer (other than U.S.
Government securities).
The percentage limitations contained in these restrictions apply at the
time of purchase of securities. Future Portfolios of the Fund may adopt
different limitations.
DETERMINING MATURITIES OF CERTAIN INSTRUMENTS
Generally, the maturity of a portfolio instrument shall be deemed to be the
period remaining until the date noted on the face of the instrument as the date
on which the principal amount must be paid, or in the case of an instrument
called for redemption, the date on which the redemption payment must be made.
However, instruments having variable or floating interest rates or demand
features may be deemed to have remaining maturities as follows: (1) a
Government Obligation with a variable rate of interest readjusted no less
frequently than annually may be deemed to have a maturity equal to the period
remaining until the next readjustment of the interest rate; (b) an instrument
with a variable rate of interest, the principal amount of which is scheduled on
the face of the
19
<PAGE>
instrument to be paid in one year or less, may be deemed to have a maturity
equal to the period remaining until the next readjustment of the interest rate;
(c) an instrument with a variable rate of interest that is subject to a demand
feature may be deemed to have a maturity equal to the longer of the period
remaining until the next readjustment of the interest rate or the period
remaining until the principal amount can be recovered through demand; (d) an
instrument with a floating rate of interest that is subject to a demand feature
may be deemed to have a maturity equal to the period remaining until the
principal amount can be recovered through demand; and (e) a repurchase agreement
may be deemed to have a maturity equal to the period remaining until the date on
which the repurchase of the underlying securities is scheduled to occur, or
where no date is specified, but the agreement is subject to demand, the notice
period applicable to a demand for the repurchase of the securities.
MANAGEMENT OF THE FUND
OFFICERS AND DIRECTORS
The Fund's officers, under the supervision of the Board of Directors,
manage the day-to-day operations of the Fund. The Directors set broad policies
for the Fund and choose its officers. Three Directors and all of the officers
of the Fund are directors, officers or employees of the Fund's adviser,
distributor or administrative services provider. Directors and officers of the
Fund are also directors and officers of some or all of the other investment
companies managed, administered, advised or distributed by Morgan Stanley Asset
Management Inc. or its affiliates. The other Directors have no affiliation with
the Fund's adviser, distributor or administrative services provider. A list of
the Directors and officers of the Fund and a brief statement of their present
positions and principal occupations during the past five years is set forth
below:
Name, Address Position Principal Occupation During
and Age with Fund Past Five Years
- ------------------- --------- ---------------------------
Barton M. Biggs* Chairman and Chairman and Director of Morgan
1221 Avenue of the Director Stanley Asset Management Inc. and
Americas Morgan Stanley Asset Management
New York, NY 10020 Limited; Managing Director of Morgan
(63) Stanley & Co., Inc.; Director of
Morgan Stanley Group Inc.; Member of
International Advisory Counsel of
the Thailand Fund; Chairman and
Director of The Brazilian Investment
Fund, Inc., The Latin American
Discovery Fund, Inc., The Malaysia
Fund, Inc., Morgan Stanley Africa
Investment Fund, Inc., Morgan Stanley
Asia-Pacific Fund, Inc., Morgan
Stanley Emerging Markets Debt Fund,
Inc., Morgan Stanley Emerging Markets
Fund, Inc., Morgan Stanley Fund Inc.,
Morgan Stanley Global Opportunity
Bond Fund, Inc., Morgan Stanley High
Yield Fund, Inc., Morgan Stanley
India Investment Fund, Inc., Morgan
Stanley Institutional Fund, Inc., The
Pakistan Investment Fund, Inc., PCS
Cash Fund, Inc., The Thai Fund, Inc.
and The Turkish Investment Fund, Inc.
20
<PAGE>
Name, Address Position Principal Occupation During
and Age with Fund Past Five Years
- ------------------- --------- ---------------------------
Warren J. Olsen* Director and Principal of Morgan Stanley & Co.,
1221 Avenue of the President Inc.; Principal of Morgan Stanley
Americas Asset Management Inc.; President and
New York, NY 10020 Director of The Brazilian Investment
(39) Fund, Inc., The Latin American
Discovery Fund, Inc., The Malaysia
Fund, Inc., Morgan Stanley Africa
Investment Fund, Inc., Morgan Stanley
Asia-Pacific Fund, Inc., Morgan
Stanley Emerging Markets Debt Fund,
Inc., Morgan Stanley Emerging Markets
Fund, Inc., Morgan Stanley Fund,
Inc., Morgan Stanley Global
Opportunity Bond Fund, Inc., Morgan
Stanley High Yield Fund, Inc., Morgan
Stanley India Investment Fund, Inc.,
Morgan Stanley Institutional Fund,
Inc., The Pakistan Investment Fund,
Inc., PCS Cash Fund, Inc., The Thai
Fund, Inc., and The Turkish
Investment Fund, Inc.
John D. Barrett, II Director Chairman and Director of Barrett
521 Fifth Avenue Associates, Inc. (investment
New York, NY 10135 counseling); Director of the Ashforth
(60) Company (real estate); Director of
the Morgan Stanley Fund, Inc., Morgan
Stanley Institutional Fund, Inc. and
PCS Cash Fund, Inc.
Gerard E. Jones Director Partner in Richards & O'Neil LLP (law
43 Arch Street firm); Director of the Morgan Stanley
Greenwich, CT 06830 Fund, Inc., Morgan Stanley
(59) Institutional Fund, Inc. and PCS Cash
Fund, Inc.
Andrew McNally IV Director Chairman and Chief Executive Officer
8255 North Central of Rand McNally (publication);
Park Avenue Director of Allendale Insurance Co.,
Skokie, IL 60076 Mercury Finance (consumer finance);
(56) Zenith Electronics, Hubbell, Inc.
(industrial electronics); Director of
the Morgan Stanley Fund, Inc., Morgan
Stanley Institutional Fund, Inc. and
PCS Cash Fund, Inc.
Samuel T. Reeves Director Chairman of the Board and CEO,
8211 North Pinacle L.L.C. (investment firm);
Fresno Street Director, Pacific Gas and Electric
Fresno, CA 93720 and PG&E Enterprises (utilities);
(61) Director of the Morgan Stanley Fund,
Inc., Morgan Stanley Institutional
Fund, Inc. and PCS Cash Fund, Inc.
21
<PAGE>
Name, Address Position Principal Occupation During
and Age with Fund Past Five Years
- ------------------- --------- ---------------------------
Fergus Reid Director Chairman and Chief Executive Officer
85 Charles Colman Blvd of LumeLite Corporation (injection
Pawling, NY 12564 molding firm); Trustee and Director
(63) of Vista Mutual Fund Group; Director
of the Morgan Stanley Fund, Inc.,
Morgan Stanley Institutional Fund,
Inc. and PCS Cash Fund, Inc.
Frederick O. Robertshaw Director Of Counsel, Bryan, Cave (law firm);
2800 North Central Avenue Previously associated with Copple,
Phoenix, AZ 85004 Chamberlin & Boehm, P.C. and Rake,
(62) Copple, Downey & Black, P.C. (law
firms); Director of the Morgan
Stanley Fund, Inc., Morgan Stanley
Institutional Fund, Inc. and PCS Cash
Fund, Inc.
Frederick B. Whittemore* Director Advisory Director of Morgan Stanley &
1251 Avenue of the Co., Inc.; Vice-Chairman and Director
Americas, 30th Flr. of The Brazilian Investment Fund,
New York, NY 10020 Inc., The Latin American Discovery
(65) Fund, Inc., The Malaysia Fund, Inc.,
Morgan Stanley Africa Investment
Fund, Inc., Morgan Stanley
Asia-Pacific Fund, Inc., Morgan
Stanley Emerging Markets Debt Fund,
Inc., Morgan Stanley Emerging Markets
Fund, Inc., Morgan Stanley Fund,
Inc., Morgan Stanley Global
Opportunity Bond Fund, Inc., Morgan
Stanley High Yield Fund,Inc., Morgan
Stanley India Investment Fund, Inc.,
Morgan Stanley Institutional Fund,
Inc., The Pakistan Investment Fund,
Inc., PCS Cash Fund, Inc., The Thai
Fund, Inc. and The Turkish Investment
Fund, Inc.
James W. Grisham* Vice President Principal of Morgan Stanley & Co.,
1221 Avenue of the Inc.; Principal of Morgan Stanley
Americas Asset Management Inc.; Vice President
New York, NY 10020 of The Brazilian Investment Fund,
(54) Inc., The Latin American Discovery
Fund, Inc., The Malaysia Fund, Inc.,
Morgan Stanley Africa Investment
Fund, Inc., Morgan Stanley
Asia-Pacific Fund, Inc., Morgan
Stanley Emerging Markets Debt Fund,
Inc., Morgan Stanley Emerging Markets
Fund, Inc., Morgan Stanley Fund,
Inc., Morgan Stanley Global
Opportunity Bond Fund, Inc., Morgan
Stanley High Yield Fund, Inc., Morgan
Stanley India Investment Fund, Inc.,
Morgan Stanley Institutional Fund,
Inc., The Pakistan Investment Fund,
Inc., PCS Cash Fund, Inc., The Thai
Fund, Inc. and The Turkish Investment
Fund, Inc.
22
<PAGE>
Name, Address Position Principal Occupation During
and Age with Fund Past Five Years
- ------------------- --------- ---------------------------
Harold J. Schaaff, Jr.* Vice President Principal of Morgan Stanley & Co.;
1221 Avenue of the General Counsel and Secretary of
Americas Morgan Stanley Asset Management Inc.;
New York, NY 10020 Vice President of The Brazilian
(35) Investment Fund, Inc., The Latin
American Discovery Fund, Inc., The
Malaysia Fund, Inc., Morgan Stanley
Africa Investment Fund, Inc., Morgan
Stanley Asia-Pacific Fund, Inc.,
Morgan Stanley Emerging Markets Debt
Fund, Inc., Morgan Stanley Emerging
Markets Fund, Inc., Morgan Stanley
Fund, Inc., Morgan Stanley Global
Opportunity Bond Fund, Inc., Morgan
Stanley High Yield Fund, Inc., Morgan
Stanley India Investment Fund, Inc.,
Morgan Stanley Institutional Fund,
Inc., The Pakistan Investment Fund,
Inc., PCS Cash Fund, Inc., The Thai
Fund, Inc. and The Turkish Investment
Fund, Inc.
Joseph P. Stadler* Vice President Vice President of Morgan Stanley
1221 Avenue of the Asset Management Inc.; Previously
Americas with Price Waterhouse LLP
New York, NY 10020 (accounting); Vice President of The
(41) Brazilian Investment Fund, Inc., The
Latin American Discovery Fund, Inc.,
The Malaysia Fund, Inc., Morgan
Stanley Africa Investment Fund, Inc.,
Morgan Stanley Asia-Pacific Fund,
Inc., Morgan Stanley Emerging Markets
Debt Fund, Inc., Morgan Stanley
Emerging Markets Fund, Inc., Morgan
Stanley Fund, Inc., Morgan Stanley
Global Opportunity Bond Fund, Inc.,
Morgan Stanley High Yield Fund, Inc.,
Morgan Stanley India Investment Fund,
Inc., Morgan Stanley Institutional
Fund, Inc., The Pakistan Investment
Fund, Inc., PCS Cash Fund, Inc., The
Thai Fund, Inc. and The Turkish
Investment Fund, Inc.
23
<PAGE>
Name, Address Position Principal Occupation During
and Age with Fund Past Five Years
- ------------------- --------- ---------------------------
Valerie Y. Lewis* Secretary Vice President of Morgan Stanley
1221 Avenue of the Asset Management Inc.; Previously
Americas with Citicorp (banking); Secretary of
New York, NY 10020 The Brazilian Investment Fund, Inc.,
(40) The Latin American Discovery Fund,
Inc., The Malaysia Fund, Inc., Morgan
Stanley Africa Investment Fund, Inc.,
Morgan Stanley Asia-Pacific Fund,
Inc., Morgan Stanley Emerging Markets
Debt Fund, Inc., Morgan Stanley
Emerging Markets Fund, Inc., Morgan
Stanley Fund, Inc., Morgan Stanley
Global Opportunity Bond Fund, Inc.,
Morgan Stanley High Yield Fund, Inc.,
Morgan Stanley India Investment Fund,
Inc., Morgan Stanley Institutional
Fund, Inc., The Pakistan Investment
Fund, Inc., PCS Cash Fund, Inc., The
Thai Fund, Inc. and The Turkish
Investment Fund, Inc.
Karl O. Hartmann Assistant Senior Vice President, Secretary and
73 Tremont Street Secretary General Counsel of Chase Global Funds
Boston, MA 02108-3913 Services Company; Previously, Leland,
(41) O'Brien, Rubinstein Associates, Inc.
(investments).
James R. Rooney Treasurer Vice President, Chase Global Funds
73 Tremont Street Services Company; Director of Fund
Boston, MA 02108-3913 Administration; Officer of various
(37) investment companies managed by
Morgan Stanley Asset Management Inc.;
Previously with Scudder, Stevens &
Clark, Inc. (investments) and Ernst &
Young LLP (accounting); Treasurer of
The Brazilian Investment Fund, Inc.,
The Latin American Discovery Fund,
Inc., The Malaysia Fund, Inc., Morgan
Stanley Africa Investment Fund, Inc.,
Morgan Stanley Asia-Pacific Fund,
Inc., Morgan Stanley Emerging Markets
Debt Fund, Inc., Morgan Stanley
Emerging Markets Fund, Inc., Morgan
Stanley Fund, Inc., Morgan Stanley
Global Opportunity Bond Fund, Inc.,
Morgan Stanley High Yield Fund, Inc.,
Morgan Stanley India Investment Fund,
Inc., Morgan Stanley Institutional
Fund, Inc., The Pakistan Investment
Fund, Inc., The Thai Fund, Inc. and
The Turkish Investment Fund, Inc.
24
<PAGE>
Name, Address Position Principal Occupation During
and Age with Fund Past Five Years
- ------------------- --------- ---------------------------
Joanna Haigney Assistant Supervisor of Fund Administration and
73 Tremont Street Treasurer Compliance, Chase Global Funds
Boston, MA 02108-3913 Services Company; Previously with
(29) Coopers & Lybrand LLP; Assistant
Treasurer of The Brazilian Investment
Fund, Inc., The Latin American
Discovery Fund, Inc., The Malaysia
Fund, Inc., Morgan Stanley Africa
Investment Fund, Inc., Morgan Stanley
Asia-Pacific Fund, Inc., Morgan
Stanley Emerging Markets Debt Fund,
Inc., Morgan Stanley Emerging Markets
Fund, Inc., Morgan Stanley Fund,
Inc., Morgan Stanley Global
Opportunity Bond Fund, Inc., Morgan
Stanley High Yield Fund, Inc., Morgan
Stanley India Investment Fund, Inc.,
Morgan Stanley Institutional Fund,
Inc., The Pakistan Investment Fund,
Inc., The Thai Fund, Inc. and The
Turkish Investment Fund, Inc.
- --------------
* "Interested Person" within the meaning of the 1940 Act.
REMUNERATION OF DIRECTORS AND OFFICERS
Effective June 28, 1995, the Open-end Fund Complex will pay each of the
nine Directors who is not an "interested person" an annual aggregate fee of
$55,000, plus out-of-pocket expenses. The Open-end Fund Complex will pay
each of the members of the Fund's Audit Committee, which consists of the
Fund's Directors who are not "interested persons," an additional annual
aggregate fee of $10,000 for serving on such a committee. The allocation of
such fees will be among the three funds in the Open-end Fund Complex in
direct proportion to their respective average net assets. For the fiscal
year December 31, 1995, the Fund paid approximately $244,000 in Directors'
fees and expenses. Directors who are also officers or affiliated persons
receive no remuneration for their services as Directors. The Fund's officers
and employees are paid by the Adviser or its agents. As of March 31, 1996,
to Fund management's knowledge, the Directors and officers of the Fund, as a
group, owned more than 1% of the outstanding common stock of the following
Portfolios of the Fund: 2.4% Active Country Allocation Portfolio - Class B
shares; 1.7% Aggressive Equity Portfolio - Class B shares; 1.7% Asian Equity
Portfolio - Class A shares; 1.8% Emerging Growth Portfolio -Class B shares;
1.0% Emerging Markets Portfolio - Class B shares; 2.0% Equity Growth
Portfolio - Class B shares; 3.3% Gold Portfolio - Class B shares; 1.3%
International Equity Portfolio - Class B shares and 4.8% Latin American
Portfolio - Class A shares. The following table shows aggregate compensation
paid to each of the Fund's Directors by the Fund and the Fund Complex,
respectively, in the fiscal year ended December 31, 1995.
25
<PAGE>
COMPENSATION TABLE
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
(1) (2) (3) (4) (5)
NAME OF AGGREGATE PENSION OR ESTIMATED TOTAL
PERSON, COMPENSATION RETIREMENT ANNUAL COMPENSATION
POSITION FROM BENEFITS ACCRUED BENEFITS FROM REGISTRANT
REGISTRANT AS PART OF FUND UPON AND FUND COMPLEX
EXPENSES RETIREMENT PAID TO DIRECTORS
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Barton M. Biggs, N/A N/A
Director and Chairman
of the Board
Warren J. Olsen, N/A N/A
Director and President
John D. Barrett, II 14,085 26,405
Director
Gerard E. Jones, 25,335 79,655
Director
Andrew McNally, IV 11,916 32,834
Director
Samuel T. Reeves, 11,916 14,303
Director
Fergus Reid, 14,085 48,517
Director
Frederick O. Robertshaw, 11,916 36,055
Director
Frederick B. Whittemore, 12,150 41,429
Director
John P. Britton*, 11,250 11,250
Director
George R. Bunn*, 12,900 12,900
Director
Peter E. deSvastich*, 11,250 25,225
Director
</TABLE>
- --------------
* As of June 30, 1995, Mssrs. Britton, Bunn and deSvastich resigned from the
Board of Directors.
26
<PAGE>
INVESTMENT ADVISORY AND ADMINISTRATIVE AGREEMENTS
Morgan Stanley Asset Management Inc. ("MSAM" or the "Adviser") is a
wholly-owned subsidiary of Morgan Stanley Group Inc. The principal offices of
Morgan Stanley Group Inc. are located at 1221 Avenue of the Americas, New York,
NY 10020. As compensation for advisory services for the fiscal years ended
December 31, 1993, December 31, 1994 and December 31, 1995, the Adviser earned
fees of approximately $17,539,000, $34,338,000 and $40,534,000, respectively,
and from such fees voluntarily waived fees of $3,037,000, $2,640,000 and
$3,526,000, respectively. For the fiscal years ended December 31, 1993,
December 31, 1994 and December 31, 1995, the Fund paid brokerage commissions of
approximately $5,827,000, $7,287,293 and $10,317,515, respectively. For the
fiscal years ended December 31, 1993, December 31, 1994 and December 31, 1995,
the Fund paid in the aggregate $797,000, $796,000 and $377,000, respectively, as
brokerage commissions to Morgan Stanley & Co. Incorporated, an affiliated
broker-dealer, which represented 13%, 11% and 4% of the total amount of
brokerage commissions paid in each respective period. For the fiscal years
ended December 31, 1993 , December 31, 1994 and December 31, 1995, the Fund paid
administrative fees to MSAM of approximately $4,662,000, $4,458,000 and
$5,238,000, respectively.
The Sub-Adviser, Sun Valley Gold Company, with principal offices at 620
Sun Valley Road, Sun Valley, Idaho, serves as the investment sub-adviser of the
Gold Portfolio, pursuant to a sub-advisory agreement among the Fund, the Adviser
and the Sub-Adviser (the "Sub-Advisory Agreement"). The Adviser and the Sub-
Adviser have entered into an indemnification agreement under which, generally,
the Sub-Adviser has agreed to indemnify the Adviser and the Fund for claims or
losses in connection with any failure by the Sub-Adviser to comply with its
obligations under the Sub-Advisory Agreement or related agreements or any act or
omission that amounts to negligence, misfeasance or bad faith, and the Adviser
has agreed to indemnify the Sub-Adviser for claims or losses in connection with
any failure by the Adviser to comply with its obligations under the Sub-Advisory
Agreement or related agreements. As compensation for sub-advisory services for
the fiscal years ended December 31, 1994 and December 31, 1995, the Sub-Adviser
earned fees of approximately $76,000 and $73,000, respectively, and from such
fees voluntarily waived fees of $36,000 and $37,000, respectively. For the
fiscal years ended December 31, 1994 and December 31, 1995, the Fund paid $8,000
and $450, respectively, as brokerage commissions to Sun Valley.
Pursuant to the MSAM Administration Agreement between the Adviser and
the Fund, the Adviser provides Administrative Services. For its services under
the Administration Agreement, the Fund pays the Adviser a monthly fee which on
an annual basis equals 0.15 of 1% of the average daily net assets of each
Portfolio.
Under the Agreement between the Adviser and The Chase Manhattan Bank,
N.A. ("Chase," successor in interest to United States Trust Company of New
York), Chase Global Funds Services Company ("CGFSC," formerly Mutual Funds
Service Company and now a Chase subsidiary) provides certain administrative
services to the Fund. CGFSC provides operational and administrative services to
investment companies with approximately $62 billion in assets and having
approximately 187,286 shareholder accounts as of March 31, 1996. CGFSC's
business address is 73 Tremont Street, Boston, Massachusetts 02108-3913.
DISTRIBUTION OF FUND SHARES
Morgan Stanley & Co. Incorporated (the "Distributor"), a wholly-owned
subsidiary of Morgan Stanley Group Inc., serves as the Distributor of the Fund's
shares pursuant to a Distribution Agreement for the Fund and a Plan of
Distribution for the Class B shares of the Portfolios (except the International
Small Cap Portfolio which does not have Class B shares) pursuant to Rule 12b-1
under the 1940 Act (each, a "Plan" and collectively, the "Plans"). Under each
Plan the Distributor is entitled to receive from these Portfolios a distribution
fee, which is accrued daily and paid quarterly, at an annual rate of up to 0.25%
of the average daily net assets of the Class B shares of these Portfolios. The
Distributor expects to allocate most of its fee to its investment representative
and investment dealers, banks or financial service firms that provide
distribution services ("Participating Dealer"). The actual amount of such
compensation is agreed upon by the Fund's Board of Directors and by the
Distributor. The Distributor may, in its discretion, voluntarily waive from
time to time all or any portion of its distribution fee and the Distributor is
free to make additional payments out of its own assets to promote the sale of
Fund shares.
The Plans obligate the Portfolios to accrue and pay to the Distributor
the fee agreed to under its Distribution Agreement. The Plans do not obligate
the Portfolios to reimburse the Distributor for the actual expenses the
Distributor may incur in fulfilling its obligations under the Plans. Thus,
under each Plan, even if the Distributor's actual expenses exceed the fee
payable to it thereunder at any given time, the Portfolios will not be obligated
to pay more than that fee. If the Distributor's actual expenses are less than
the fee it receives, the Distributor will retain the full amount of the fee. The
Plans for the Class B shares were most recently approved by the Fund's Board of
Directors, including those directors who are not "interested persons" of the
Fund as that term is defined in the 1940 Act and who have no direct or indirect
financial interest in the operation of a Plan or in any agreements related
thereto, on September 20, 1995.
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The Class B shares commenced operations on January 2, 1996. Therefore,
no Rule 12b-1 fees were paid to the Distributor for the fiscal year ended
December 31, 1995. The Mortgage-Backed Securities, China Growth, MicroCap and
International Magnum Portfolios were not in operation in the fiscal year ended
December 31, 1995.
CODE OF ETHICS
The Board of Directors of the Fund has adopted a Code of Ethics under
Rule 17j-1 of the 1940 Act which incorporates the Code of Ethics of the Adviser
(together, the "Codes"). The Codes significantly restrict the personal
investing activities of all employees of the Adviser and, as described below,
impose additional, more onerous, restrictions on the Fund's investment
personnel.
The Codes require that all employees of the Adviser preclear any
personal securities investment (with limited exceptions, such as government
securities). The preclearance requirement and associated procedures are
designed to identify any substantive prohibition or limitation applicable to the
proposed investment. The substantive restrictions applicable to all employees
of the Adviser include a ban on acquiring any securities in a "hot" initial
public offering and a prohibition from profiting on short-term trading in
securities. In addition, no employee may purchase or sell any security that at
the time is being purchased or sold (as the case may be), or to the knowledge of
the employee is being considered for purchase or sale, by any fund advised by
the Adviser. Furthermore, the Codes provide for trading "blackout periods" that
prohibit trading by investment personnel of the Fund within periods of trading
by the Fund in the same (or equivalent) security.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
The names and addresses of the holders of 5% or more of the outstanding
shares of any class of the Fund as of March 31, 1996 and the percentage of
outstanding shares of such classes owned beneficially or of record by such
shareholders as of such date are, to Fund management's knowledge, as follows:
ACTIVE COUNTRY ALLOCATION PORTFOLIO: The Trustees of Columbia University in the
City of New York, 475 Riverside Drive, Suite 401, New York, NY 10115, owned 15%
of such Portfolio's total outstanding Class A shares.
City of New York Deferred Compensation Plan, 40 Rector Street, 3rd Floor, New
York, NY 10006, owned 16% of such Portfolio's total outstanding Class A shares.
Oglebay Norton Company, 1100 Superior Avenue, Cleveland, OH 44114-2598, owned
11% of such Portfolio's total outstanding Class A shares.
The Finn Foundation, Northern Trust Co., Master Trust Dept., P.O. Box 92984,
Chicago, IL 60675, owned 7% of such Portfolio's total outstanding Class A
shares.
Strafe & Co., F/A/O/ in Thompson Consumer Electronics, 235 West Schrock Road,
Westerville, OH 43081, owned 7% of such Portfolio's total outstanding Class A
shares.
Sahara Enterprises, Inc., 3 First National Plaza, Suite 2000, Chicago,
IL 60602-4260, owned 6% of such Portfolio's total outstanding Class A shares.
Jeffrey R. Holzschuh, 66 Sawmill Lane, Greenwich, CT 06830-4046, owned 14% of
such Portfolio's total outstanding Class B shares.
Benefit Administrators of America Inc., Attn: John Stephens, 626 Grand Avenue,
Des Moines, IA 50309, owned 14% of such Portfolio's total outstanding Class B
shares.
David Johnson and Audrey E. Johnson, 405 East Winchester, Libertyville, IL
60048-1677, owned 10% of such Portfolio's total outstanding Class B shares.
Mercury & Co., C/O Investors Bank & Trust Company, P.O. Box 1537 Top 57, Boston,
MA 02205-1537, owned 8% of such Portfolio's total outstanding Class B shares.
John P. and Janet K. Hanlon, 7 Stafford Place, Towaco, NJ 07082, owned 7% of
such Portfolio's total outstanding Class B shares.
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Michael and Maureen Cassedy, 1221 Jones Street, Apt. D1, San Francisco, CA
94109-4228, owned 7% of such Portfolio's total outstanding Class B shares.
Guarantee & Trust Company, IRA R/O, 101 S. Spring Street, La Grange, IL 60525,
owned 6% of such Portfolio's total outstanding Class B shares.
AGGRESSIVE EQUITY PORTFOLIO: Valassis Enterprises - Equity C/O Franklin
Enterprises, 520 Lake Cook Road, Suite 380, Deerfield, IL 60015, owned 15% of
such Portfolio's total outstanding Class A shares.
Kinghugh S.A., C/O Office of Directors, Chin Lan Building, 306 Tun Hwa Road,
South Taipei, owned 10% of such Portfolio's total outstanding Class A shares.
Hullbridge Investement Limited, The Tropic Isle Building, Wickahams Cay Tortola,
British Virgin Islands, owned 8% of such Portfolio's total outstanding Class A
shares.
Guy L. Chazal, Morgan Stanley & Company, 1221 Avenue of the Americas - 33rd
floor, New York, NY 10020, owned 8% of such Portfolio's total outstanding Class
B shares.
John S. Richardson, 100 Peachtree Way, Atlanta, GA 30305-3738, owned 7% of such
Portfolio's total outstanding Class B shares.
Caroline B. Case, 54 Tanglewylde Avenue, Bronxville, NY 10708, owned 7% of such
Portfolio's total outstanding Class B shares.
Peter Boer, 47 Country Road, Village of Golf, FL 33436-5604, owned 7% of such
Portfolio's total outstanding Class B shares.
Mr. James Fuld, Jr., 114 East 72nd Street, New York, NY 10021, owned 6% of such
Portfolio's total outstanding Class B shares.
Walter Kaye, 475 Park Avenue, new York, NY 10022-1902, owned 5% of such
Portfolio's total outstanding Class B shares.
ASIAN EQUITY PORTFOLIO: Association De Bienfaisance Et De Retraite Des
Policiers De La Communaute Urbaine De Montreal, 480 Gilford Street, Montreal,
Quebec H2J1N3, owned 8% of such Portfolio's total outstanding Class A shares.
Northern Trust Company Trustee, FBO Morgan Stanley Profit Sharing Plan, P.O.Box
92956, Chicago, IL 60675-2956, owned 5% of such Portfolio's total outstanding
Class A shares.
BALANCED PORTFOLIO: The American Roentgen Ray Society, 1891 Preston White
Drive, Reston, VA 22091-5431, owned 27% of such Portfolio's total outstanding
Class A shares.
William Guthrie, IRA Rollover, 435 Sheridan Road, Winnetka, IL 60093-2626,
owned 16% of such Portfolio's total outstanding Class B shares.
EMERGING GROWTH PORTFOLIO: Northern Trust Company Trustee, FBO Morgan Stanley
Profit Sharing Plan, P.O. Box 92956, Chicago, IL 60675-2956, owned 26% of such
Portfolio's total outstanding Class A shares.
Allendale Mutual Insurance Co., P.O. Box 7500, Johnston, RI 02919-0750, owned
10% of such Portfolio's total outstanding Class A shares.
Mac & Co. A/C Benf 0741602, P.O. Box 3198, Pittsburgh, PA 15230, owned 8% of
such Portfolio's total outstanding Class A shares.
EMERGING MARKETS DEBT PORTFOLIO: Northwestern University, 633 Clark Street,
Evanston, IL 60208-1122, owned 13% of such Portfolio's total outstanding Class A
shares.
Swarthmore College, 500 College Avenue, Swarthmore, PA 19081-1110, owned 7% of
such Portfolio's total outstanding Class A shares.
Eleanor S. Herkert, Trustee of the Eleanor S. Herkert Trust, 2000 Diana Drive
Apt. 101, Lakeview West, Hallandale, FL 33009-4709, owned 6% of such
Portfolio's total outstanding Class B shares.
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<PAGE>
Donald A. Moore, Jr., 160 E. 42 Street, New York, NY 10021, owned 5% of such
Portfolio's total outstanding Class B shares.
Delaware Charter Guarantee & Trust Company, IRA Rollover, 15 Garden Place,
Brooklyn, NY 11204-4581, owned 5% of such Portfolio's total outstanding Class B
shares.
Paul and Lauren Ghaffari, 49 Grosset Road, Riverside, CT 06878, owned 5% of
such Portfolio's total outstanding Class B shares.
David Brooks Gendron, c/o CS First Boston - London, 55 East 52nd Street, New
York, NY 10055, owned 5% of such Portfolio's total outstanding Class B shares.
EMERGING MARKETS PORTFOLIO: Ministers & Missionaries Benefit Board of the
American Baptist Churches, 475 Riverside Drive, New York, NY 10115, owned 10% of
such Portfolio's total outstanding Class A shares.
Ewing Marion Kauffman Foundation, 4900 Oak Street, Kansas City, MO 64112, owned
8% of such Portfolio's total outstanding Class A shares.
EQUITY GROWTH PORTFOLIO: Northern Trust Company Trustee, FBO Morgan Stanley
Profit Sharing Plan, P.O. Box 92956, Chicago, IL 60675, owned 35% of such
Portfolio's total outstanding Class A shares.
Donald A. Moore Jr., 160 E. 42 Street, New York, NY 10021, owned 8% of such
Portfolio's total outstanding Class B shares.
EUROPEAN EQUITY PORTFOLIO: James P. Smith Jr., 552 Ponte Vedra Boulevard, Ponte
Vedra, FL 32082-2316, owned 10% of such Portfolio's total outstanding Class B
shares.
Beatrice Synder, Trustee FBO Jay Synder 21484, 300 Winston Drive Apt. 1711,
Cliff Side Park, NJ 07010-3222, owned 10% of such Portfolio's total outstanding
Class B shares.
Deborah Meredith, 1386 Pritchett Court, Los Altos, CA 94024-5713, owned 10% of
such Portfolio's total outstanding Class B shares.
Steven J. Wong, 20021 Marribrook Drive, Saratoga, CA 95070-5445, owned 10% of
such Portfolio's total outstanding Class B shares.
Benedikt Von Schroder & Kristin Von Schroder, Burnitz str. 67, 6000 Frankfurt
70, Germany, owned 9% of such Portfolio's total outstanding Class B shares.
FIXED INCOME PORTFOLIO: Northern Trust Company Trustee, FBO Morgan Stanley
Profit Sharing Plan, P.O. Box 92956, Chicago, IL 60675-2956, owned 22% of such
Portfolio's total outstanding Class A shares.
Brooks School, c/o Mr. Frank Marino, North Andover, MA 01845, owned 6% of such
Portfolio's total outstanding Class A shares.
Morgan Stanley Foundation, 1221 Avenue of the Americas, New York, NY 10020,
owned 5% of such Portfolio's total outstanding Class A shares.
John B. & Judy D. Morel, 28 Twelve Pines, The Woodlands, TX 77381, owned 9% of
such Portfolio's total outstanding Class B shares.
William M. Manger, Jr., 8 E. 81 Street, New York, NY 10028-0201, owned 5% of
such Portfolio's total outstanding Class B shares.
Harold J. Schaaff, IRA, 49 Old Orchard Lane, Ocean TWP, NJ 07712, owned 5% of
such Portfolio's total outstanding Class B shares.
Delaware Charter & Guarantee & Trust, IRA Rollover, 5813 East North Avenue,
Kalamazoo, MI 49009, owned 5% of such Portfolio's total outstanding Class B
shares.
Michael J. and Patricia L. Berchtold, Morgan Stanley, 1251 Avenue of the
Americas, Hong Kong Pouch, New York, NY 10020-1104, owned 5% of such
Portfolio's total outstanding Class B shares.
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<PAGE>
GLOBAL EQUITY PORTFOLIO: Robert College of Istanbul Turkey C/O Morgan Stanley
Asset Management, 25 Cabot Square, London, England E144QA, owned 49% of such
Portfolio's total outstanding Class A shares.
Gaz Metropolitan and Company Limited Partnership, 1717 Du Havre, Montreal,
Canada H2K-2X3, owned 15% of such Portfolio's total outstanding Class A shares.
JM Kaplan Fund, Inc., 880 Third Avenue 3rd floor, New York, NY 10022, owned 13%
of such Portfolio's total outstanding Class A shares.
Divtex and Company FBO, Pritchard Hubble and Herr C/O Texas Commerce Bank, P.O.
Box 951405, Dallas, TX 75395, owned 9% of such Portfolio's total outstanding
Class A shares.
North American Trust Company, FBO Heller/Robert S. Venning, P.O. Box 84419, San
Diego, CA 92138, owned 13% of such Portfolio's total outstanding Class B
shares.
Douglas E. Ebert Trust, Douglas E. Ebert, Trustee and Successor in Trust, 3470
Twin Oaks Court, W. Bloomfield, MI 48324-3249, owned 7% of such Portfolio's
total outstanding Class B shares.
John F. Raynolds III, 386 Park Avenue, South 18th Floor, New York, NY 10016,
owned 6% of such Portfolio's total outstanding Class B shares.
GLOBAL FIXED INCOME PORTFOLIO: Farm Credit Bank Retirement Plan, Columbia
District American Industries Trust Company Trustee, 5700 NW Central Drive, 4th
Floor, Houston, TX 77092, owned 15% of such Portfolio's total outstanding Class
A shares.
Northern Trust Company as Custodian FBO The Lund Foundation, P.O. Box 92956,
Chicago, IL 60675, owned 11% of such Portfolio's total outstanding Class A
shares.
The Northern Trust Customer FBO Resort Condominiums International, P.O. Box
92956, Chicago, IL 60675-2956, owned 7% of such Portfolio's total outstanding
Class A shares.
Divtex and Co., FBO Pritchard Hubble and Herr, c/o Texas Commerce Bank, P.O. Box
951405, Dallas, TX 75395-1405, owned 6% of such Portfolio's total outstanding
Class A shares.
David Brooks Gendron, C/O CS First Boston - London, 55 East 52nd Street, New
York, NY 10055, owned 11% of such Portfolio's total outstanding Class B shares.
Marjorie S. Burggraf, FBO The Robert V. Burgraff Family Trust UTA DTD 11-5-86,
2378 E. Oakmont Drive, Idaho Falls, ID 83404-7720, owned 8% of such Portfolio's
total outstanding Class B shares.
Harold L. Tailisman, 837 New Hampshire Avenue, Washington, DC 20037-2305, owned
6% of such Portfolio's total outstanding Class B shares.
Steven J. Wong, 20021 Marribrook Drive, Saratoga, CA 95070-5445, owned 5% of
such Portfolio's total outstanding Class B shares.
Alexander P. Hixon Jr., Anthony Hixon & Andrew R. Hixon Trustees FBO Hixon
Family Char. Remainder, 70 S. Lake Avenue STE 1075, Pasadena, CA 91101-2206,
owned 5% of such Portfolio's total outstanding Class B shares.
Thomas E. Congden, 1776 Lincoln Street, Suite 1100, Denver, CO 80203-1080,
owned 5% of such Portfolio's total outstanding Class B shares.
GOLD PORTFOLIO: Stockton Trust Partnership, 7373 North Scottsdale Road,
Scottsdale, AZ 85253, owned 49% of such Portfolio's total outstanding Class A
shares.
Judith L. Biggs, 390 Riversville Road, Greenwich, CT 06831-3200, owned 12% of
such Portfolio's total outstanding Class A shares.
Charlotte Beers, Ogilvy & Mather, 309 West 49th Street, New York, NY 10019-7316,
owned 7% of such Portfolio's total outstanding Class A shares.
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<PAGE>
Trust U/A Sixth Will of Howard Ross, C/O James H. Ross, Rossrock Company, Inc.,
150 East 52nd Street, New York, NY 10020, owned 5% of such Portfolio's total
outstanding Class A shares.
Kinghugh S.A., c/o Office of Directors, Chin Lan Building, 306 Tun Hwa Road,
South Taipei, owned 5% of such Portfolio's total outstanding Class A shares.
Sunil T. Wadhwani, 930 Osage Road, Pittsburgh, PA 15243, owned 47% of such
Portfolio's total outstanding Class B shares.
Gregory W. Neumann, 5 Mt. Austin Road, House B, The Peak, Hong Kong, owned 20%
of such Portfolio's total outstanding Class B shares.
Michael J. and Patricia L. Berchtold, Morgan Stanley, 1251 Avenue of the
Americas, Hong Kong Pouch, New York, NY 10020-1104, owned 10% of such
Portfolio's total outstanding Class B shares.
Matthew and Deborah Carrara, 443 W. Eugnie Street, Apt. 3E, Chicago, IL 60614,
owned 8% of such Portfolio's total outstanding Class B shares.
Christian B. Malone, 750 Columbus Avenue, Apt. 8N, New York, NY 10025-6479,
owned 7% of such Portfolio's total outstanding Class B shares.
HIGH YIELD PORTFOLIO: Northern Trust Company Trustee, FBO Morgan Stanley Profit
Sharing Plan, P.O. Box 92956, Chicago, IL 60675-2956, owned 28% of such
Portfolio's total outstanding Class A shares.
Valassis Enterprises - Equity, c/o Franklin Enterprises, 520 Lake Cook Road,
Suite 380, Deerfield, IL 60015, owned 19% of such Portfolio's total outstanding
Class A shares.
Morgan Stanley & Co. Pension Fund, c/o Northern Trust Company, 770 Broadway, New
York, NY 10003, owned 6% of such Portfolio's total outstanding Class A shares.
Austin Koenen, 360 Sunset Road, Pompton Plains, NJ 07444-1513, owned 15% of
such Portfolio's total outstanding Class B shares.
Arthur H. and Julia E. Maurer, 5349 Cedar Lake Road Apt. 12-33, Boynton Beach,
FL 33437-3046, owned 7% of such Portfolio's total outstanding Class B shares.
Eleanor S. Herkert, Trustee of the Eleanor S. Herkert Trust, 2000 Diana Drive,
Apt. 101, Hallandale, FL 33009-4709, owned 7% of such Portfolio's total
outstanding Class B shares.
David J. Barrett, 320 E. 46th Street, Apt. 18-H, New York, NY 10017, owned 5%
of such Portfolio's total outstanding Class B shares.
INTERNATIONAL MAGNUM PORTFOLIO: Ameritas Life Insurance Corporation, P.O. Box
81889, Lincoln, NE 68501, owned 57% of such Portfolio's total outstanding Class
A shares.
Luanne C. Wells and Paul C. Heeschen Trustees, FBO Palm Trust, 450 Newport
Center Drive, Newport Beach, CA 92660-7614, owned 43% of such Portfolio's total
outstanding Class A shares.
The Chase Manhattan Bank, NA, Custodian for the IRA of Toni Villasenor Brown,
335 Emerty Drive East, Stamford, CT 06902, owned 50% of such Portfolio's total
outstanding Class B shares.
The Chase Manhattan Bank, NA, Custodian for the IRA of Jeffrey Paul Brown, 335
Emery Drive East, Stamford, CT 06902, owned 50% of such Portfolio's total
outstanding Class B shares.
INTERNATIONAL SMALL CAP PORTFOLIO: The Short Brothers Pension Fund, P.O. Box
241, Airport Road, Belfast, N. Ireland, owned 11% of such Portfolio's total
outstanding Class A shares.
The Casey Family Program, 1300 Dexter Avenue, Suite 400, Seattle, WA 98109-3547,
owned 8% of such Portfolio's total outstanding Class A shares.
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<PAGE>
Trustees of Boston College Attn: Paul Haran Associates Treasurer, St. Thomas
More Hall 310, Chestnut Hill, MA 02167, owned 7% of such Portfolio's total
outstanding Class A shares.
General Mills, Inc. Master Trust: Pooled International Fund, One General Mills
Blvd., Minneapolis, MN 55426, owned 7% of such Portfolio's total outstanding
Class A shares.
JAPANESE EQUITY PORTFOLIO: Sunil T. Wadhwani, 930 Osage Road, Pittsburgh, PA
15243, owned 7% of such Portfolio's total outstanding Class B shares.
William H. Davidow, 85 Robles Drive, Woodside, CA 94062-2204, owned 6% of such
Portfolio's total outstanding Class B shares.
Eric Dunn, Investment Account, 1470 Arcadia Place, Palo Alto, CA 94303, owned
6% of such Portfolio's total outstanding Class B shares.
LATIN AMERICAN PORTFOLIO: Chicago Methodist Episcopal Church Aid Society, C/O
Gordon Worley, 4401 Gulf Shore Boulevard, Naples, FL 33940, owned 29% of such
Portfolio's total outstanding Class B shares.
Henri Dyner, 232 Truman Drive, Cresskill, NJ 07626, owned 29% of such
Portfolio's total outstanding Class B shares.
John P. Hanlon and Janet K. Hanlon, 7 Stafford Place, Towaco, NJ 07082, owned
10% of such Portfolio's total outstanding Class B shares.
Lawrence B. Sorrel, 58 Taunton Road, Scarsdale, NY 10583, owned 8% of such
Portfolio's total outstanding Class B shares.
MUNICIPAL BOND PORTFOLIO: Daniel F. McDonald and Maria J. McDonald, 8550 Old
Dominion Drive, McLean, VA 22102, owned 11% of such Portfolio's total
outstanding Class A shares.
Cushman Trust, C/O Cambrian Services, 1114 Avenue of the Americas, Suite 2702,
New York, NY 10036, owned 5% of such Portfolio's total outstanding Class A
shares.
Arnold E. Bellowe and Jill I. Bellowe Trustees, 915 Park Lane, Montecito, CA
93108-1421, owned 5% of such Portfolio's total outstanding Class A shares.
James A. Rutherford, C/O Wingset Inc., 15 South High Street, P.O. Box 166, New
Albany, OH 43054-0166, owned 5% of such Portfolio's total outstanding Class A
shares.
James W. Grisham and Diana E. Grisham, 454 South Pleasant Avenue, Ridgewood, NJ
07450-5446, owned 100% of such Portfolio's total outstanding Class B shares.
SMALL CAP VALUE EQUITY PORTFOLIO: Morgan Stanley & Co. Pension Fund, c/o
Northern Trust Company, 770 Broadway Street, New York, NY 10003, owned 12% of
such Portfolio's total outstanding Class A shares.
Kinney Printing Co-Employees, Attn: Dolores M. Miklos, 4801 South Lawndale,
Chicago, IL 60632-3018, owned 92% of such Portfolio's total outstanding Class B
shares.
George W. Gardner, Self Declaration of Trust, 70 E. Cedar, Chicago, IL 60611,
owned 7% of such Portfolio's total outstanding Class B shares.
Frank E. Hunt Trust, 8627 Madison Drive, Niles, IL 60648-2321, owned 6% of such
Portfolio's total outstanding Class B shares.
Michael E. Dee, C/O Morgan Stanley Mailroom, 1585 Broadway, New York, NY
10036-8293, owned 6% of such Portfolio's total outstanding Class B shares.
U.S. REAL ESTATE PORTFOLIO: European Patent Organization Pension Reserve Fund,
Erhardtstrasse 27, Munich, Germany 80331, owned 7% of such Portfolio's total
outstanding Class A shares.
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<PAGE>
Morgan, Stanley & Co. Pension Fund, C/O Northern Trust Company, 770 Broadway,
New York, NY 10003, owned 10% of such Portfolio's total outstanding Class A
shares.
Eleanor S. Herkert, Trustee of The Eleanor S. Herkert Trust, 2000 Diana Drive,
Lakeview West, Hallandale, FL 33009-4709, owned 10% of such Portfolio's total
outstanding Class B shares.
Kansas Children's Service League, P.O. Box 517, Wichita, KS 67201, owned 8% of
such Portfolio's total outstanding Class B shares.
Donald A. Moore, Jr., 160 E. 72 Street, New York, NY 10021, owned 8% of such
Portfolio's total outstanding Class B shares.
VALUE EQUITY PORTFOLIO: Northern Trust Company Trustee, FBO Morgan Stanley
Profit Sharing Plan, P.O. Box 92956, Chicago, IL 60675, owned 17% of such
Portfolio's total outstanding Class A shares.
Victoria B. McLaughlin, Upper Dogwood Lane, Rye, NY 10580, owned 8% of such
Portfolio's total outstanding Class B shares.
Delaware Charter Guarantee & Trust Company, C/F Nelaura O. Lewis, IRA Rollover,
78 Cedar Cliff Road, Riverside, CT 06878, owned 5% of such Portfolio's total
outstanding Class B shares.
NET ASSET VALUE FOR MONEY MARKET PORTFOLIOS
The Money Market Portfolio and the Municipal Money Market Portfolio seek
to maintain a stable net asset value per share of $1.00. These Portfolios use
the amortized cost method of valuing their securities, which does not take into
account unrealized gains or losses. The use of amortized cost and the
maintenance of each Portfolio's per share net asset value at $1.00 is based on
the Portfolio's election to operate under the provisions of Rule 2a-7 under the
1940 Act. As a condition of operating under that Rule, each of the Money Market
Portfolios must maintain a dollar-weighted average portfolio maturity of 90 days
or less, purchase only instruments having remaining maturities of 397 days or
less, and invest only in securities which are of "eligible quality" as
determined in accordance with regulations of the Commission.
The Rule also requires that the Directors, as a particular
responsibility within the overall duty of care owed to shareholders, establish
procedures reasonably designed, taking into account current market conditions
and each Portfolio's investment objectives, to stabilize the net asset value per
share as computed for the purposes of sales and redemptions at $1.00. These
procedures include periodic review, as the Directors deem appropriate and at
such intervals as are reasonable in light of current market conditions, of the
relationship between the amortized cost value per share and a net asset value
per share based upon available indications of market value. In such review,
investments for which market quotations are readily available are valued at the
most recent bid price or quoted yield available for such securities or for
securities of comparable maturity, quality and type as obtained from one or more
of the major market makers for the securities to be valued. Other investments
and assets are valued at fair value, as determined in good faith by the
Directors.
In the event of a deviation of over 1/2 of 1% between a Portfolio's net
asset value based upon available market quotations or market equivalents and
$1.00 per share based on amortized cost, the Directors will promptly consider
what action, if any, should be taken. The Directors will also take such action
as they deem appropriate to eliminate or to reduce to the extent reasonably
practicable any material dilution or other unfair results which might arise from
differences between the two. Such action may include redemption in kind,
selling instruments prior to maturity to realize capital gains or losses or to
shorten the average maturity, withholding dividends, paying distributions from
capital or capital gains or utilizing a net asset value per share as determined
by using available market quotations.
There are various methods of valuing the assets and of paying dividends
and distributions from a money market fund. Each of the Money Market and
Municipal Money Market Portfolios values its assets at amortized cost while also
monitoring the available market bid price, or yield equivalents. Since
dividends from net investment income will be declared daily and paid monthly,
the net asset value per share of each Portfolio will ordinarily remain at $1.00,
but each Portfolio's daily dividends will vary in amount. Net realized gains,
if any, will normally be declared and paid monthly.
34
<PAGE>
PERFORMANCE INFORMATION
The Fund may from time to time quote various performance figures to
illustrate the Portfolios' past performance.
Performance quotations by investment companies are subject to rules
adopted by the Commission, which require the use of standardized performance
quotations. In the case of total return, non-standardized performance
quotations may be furnished by the Fund but must be accompanied by certain
standardized performance information computed as required by the Commission.
Current yield and average annual compounded total return quotations used by the
Fund are based on the standardized methods of computing performance mandated by
the Commission. An explanation of those and other methods used by the Fund to
compute or express performance follows.
TOTAL RETURN
From time to time each Portfolio, except the Money Market and Municipal
Money Market Portfolios, may advertise total return for each class of shares of
the Portfolio. Total return figures are based on historical earnings and are
not intended to indicate future performance. The average annual total return is
determined by finding the average annual compounded rates of return over 1-, 5-,
and 10-year periods (or over the life of the Portfolio) that would equate an
initial hypothetical $1,000 investment to its ending redeemable value. The
calculation assumes that all dividends and distributions are reinvested when
paid. The quotation assumes the amount was completely redeemed at the end of
each 1-, 5-, and 10-year period (or over the life of the Portfolio) and the
deduction of all applicable Fund expenses on an annual basis.
The average annual compounded rates of return (unless otherwise noted)
for the Fund's Portfolios for the one year and five year periods ended December
31, 1995 and for the period from inception through December 31, 1995 are as
follows:
<TABLE>
<CAPTION>
Name of Portfolio Since Date
and Date of Inception One Year Five Year of Inception
--------------------- -------- --------- ------------
<S> <C> <C> <C>
International Equity
August 4, 1989. . . . . . . . 11.77% 14.24% 10.82%
Emerging Growth
November 1, 1989. . . . . . . 33.31 14.48 13.36
Value Equity
January 31, 1990. . . . . . . 33.69 15.65 11.86
Balanced
February 28, 1990 . . . . . . 23.63 11.45 10.31
Equity Growth
April 2, 1991 . . . . . . . . 45.02 N/A 14.33
<CAPTION>
Name of Portfolio Since Date
and Date of Inception One Year Five Year of Inception
--------------------- -------- --------- ------------
<S> <C> <C> <C>
Global Fixed Income
May 1, 1991 . . . . . . . . . 19.32 N/A 8.95
Fixed Income
May 15, 1991. . . . . . . . . 18.76 N/A 9.18
Asian Equity
July 1, 1991. . . . . . . . . 6.87 N/A 21.85
35
<PAGE>
Active Country Allocation
<CAPTION>
<S> <C> <C> <C>
January 17, 1992. . . . . . . 10.57 N/A 8.46
Global Equity
July 15, 1992 . . . . . . . . 18.66 N/A 18.21
Emerging Markets
September 25, 1992. . . . . . (12.77) N/A 13.16
High Yield
September 28, 1992. . . . . . 23.35 N/A 12.28
International Small Cap
December 15, 1992 . . . . . . 2.60 N/A 16.30
Small Cap Value Equity
December 17, 1992 . . . . . . 20.63 N/A 11.61
European Equity
April 2, 1993 . . . . . . . . 11.85 N/A 18.68
Emerging Markets Debt
February 1, 1994. . . . . . . 28.23 N/A 5.18
Gold
February 1, 1994. . . . . . . 13.21 N/A 1.87
Japanese Equity
April 25, 1994. . . . . . . . (3.64) N/A (3.17)
Latin American
January 18, 1995. . . . . . . N/A N/A (8.68)
Municipal Bond
January 18, 1995. . . . . . . N/A N/A 8.80
U.S. Real Estate
February 24, 1995 . . . . . . N/A N/A 21.07
Aggressive Equity
March 8, 1995 . . . . . . . . N/A N/A 41.25
International Magnum
March 15, 1996. . . . . . . . N/A N/A N/A
</TABLE>
These figures were calculated according to the following formula:
P(1 + T)to the nth power = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
36
<PAGE>
ERV = ending redeemable value of hypothetical $1,000 payment made at
the beginning of the 1-, 5-, or 10-year periods at the end of
the 1-, 5-, or 10-year periods (or fractional portion thereof).
CALCULATION OF YIELD FOR NON-MONEY MARKET PORTFOLIOS
From time to time certain of the Fund's Portfolios may advertise yield.
Current yield reflects the income per share earned by a Portfolio's
investments.
Current yield is determined by dividing the net investment income per
share earned during a 30-day base period by the maximum offering price per share
on the last day of the period and annualizing the result. Expenses accrued for
the period include any fees charged to all shareholders during the base period.
The respective yields for certain of the Fund's Portfolios for the
30-day period ended December 31, 1995 were as follows:
<TABLE>
<CAPTION>
PORTFOLIO NAME 30-DAY YIELD
-------------- ------------
<S> <C>
Emerging Markets Debt . . . . . . . 15.67%
Fixed Income. . . . . . . . . . . . 6.39%
Global Fixed Income . . . . . . . . 5.91%
High Yield. . . . . . . . . . . . . 10.65%
Municipal Bond. . . . . . . . . . . 4.17%
</TABLE>
These figures were obtained using the following formula:
Yield = 2[( a - b + 1 )to the 6th power - 1]
------
cd
where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the
period that were entitled to receive income distributions
d = the maximum offering price per share on the last day of the
period.
CALCULATION OF YIELD FOR MONEY MARKET PORTFOLIOS
The current yield of the Money Market and Municipal Money Market
Portfolios is calculated daily on a base period return for a hypothetical
account having a beginning balance of one share for a particular period of time
(generally 7 days). The return is determined by dividing the net change
(exclusive of any capital changes in such account) by its average net asset
value for the period, and then multiplying it by 365/7 to determine the
annualized current yield. The calculation of net change reflects the value of
additional shares purchased with the dividends by the Portfolio, including
dividends on both the original share and on such additional shares. The yields
of the Money Market and Municipal Money Market Portfolios for the 7-day period
ended Decmber 31, 1995 were 5.21% and 3.91%, respectively. An effective yield,
which reflects the effects of compounding and represents an annualization of the
current yield with all dividends reinvested, may also be calculated for each
Portfolio by dividing the base period return by 7, adding 1 to the quotient,
raising the sum to the 365th power, and subtracting 1 from the result. The
effective yields of the Money Market and Municipal Money Market Portfolios for
the 7-day period ended December 31, 1995 were 5.34% and 3.99%, respectively.
37
<PAGE>
The yield of a Portfolio will fluctuate. The annualization of a week's
dividend is not a representation by the Portfolio as to what an investment in
the Portfolio will actually yield in the future. Actual yields will depend on
such variables as investment quality, average maturity, the type of instruments
the Portfolio invests in, changes in interest rates on instruments, changes in
the expenses of the Fund and other factors. Yields are one basis investors may
use to analyze the Portfolios of the Fund, and other investment vehicles;
however, yields of other investment vehicles may not be comparable because of
the factors set forth in the preceding sentence, differences in the time periods
compared, and differences in the methods used in valuing portfolio instruments,
computing net asset value and calculating yield.
TAXABLE EQUIVALENT YIELD FOR THE MUNICIPAL BOND AND MUNICIPAL MONEY MARKET
PORTFOLIO
It is easy to calculate your own taxable equivalent yield if you know
your tax bracket. The formula is:
Tax Free Yield
--------------------
1 - Your Tax Bracket = Your Taxable Equivalent Yield
For example, if you are in the 28% tax bracket and can earn a tax-free
yield of 7.5%, the taxable equivalent yield would be 10.42%.
The table below indicates the advantages of investments in Municipal
Bonds for certain investors. Tax-exempt rates of interest payable on a
Municipal Bond (shown at the top of each column) are equivalent to the taxable
yields set forth opposite the respective income tax levels, based on income tax
rates effective for the tax year 1995 under the Internal Revenue Code. There
can, of course, be no guarantee that the Municipal Bond Portfolio or Municipal
Money Market Portfolio will achieve a specific yield. Also, it is possible that
some portion of the Portfolio's dividends may be subject to Federal income
taxes. A substantial portion, if not all, of such dividends may be subject to
state and local taxes.
TAXABLE EQUIVALENT YIELD TABLE
<TABLE>
<CAPTION>
Sample Level of Taxable Equivalent Rates
Taxable Income Based on Tax-Exempt Yield of:
-------------- -----------------------------
Federal
Income
Joint Single Tax
Return Return Bracket 3% 4% 5% 6% 7% 8% 9% 10% 11%
- ------ ------ ------- -- -- -- -- -- -- -- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$0-39,000 $0-23,350 15.0% 3.5% 4.7% 5.9% 7.1% 8.2% 9.4% 10.6% 11.8% 12.9%
39,000-94,250 23,350-56,550 28.0 4.2 5.6 6.9 8.3 9.7 11.1 12.5 13.9 15.3
94,250-143,600 56,550-117,950 31.0 4.3 5.8 7.2 8.7 10.1 11.6 13.0 14.5 15.9
143,600-256,500 117,950-256,500 36.0 4.7 6.3 7.8 9.4 10.9 12.5 14.1 15.6 17.2
over 256,500 over 256,500 39.6 5.0 6.6 8.3 9.9 11.6 13.2 14.9 16.6 18.2
</TABLE>
- -------
* Net amount subject to 1995 Federal Income Tax after deductions and
exemptions, not indexed for 1995 income tax rates.
The taxable equivalent yields for the Municipal Money Market and Municipal Bond
Portfolios for the seven days ended December 31, 1995 assuming a Federal income
tax rate of 39.6% (maximum rate), were 6.47% and 7.86%, respectively. The
taxable equivalent effective yields for the Municipal Money Market and Municipal
Bond Portfolios for the seven days ended December 31, 1995, assuming the same
tax rate, were 6.61% and 8.05%, respectively.
COMPARISONS
To help investors better evaluate how an investment in a Portfolio of
Morgan Stanley Institutional Fund, Inc. might satisfy their investment
objective, advertisements regarding the Fund may discuss various measures of
Fund performance as reported by various financial publications. Advertisements
may also compare performance (as calculated above) to performance as reported by
other investments, indices and averages. The following publications may be
used:
(a) CDA Mutual Fund Report, published by CDA Investment Technologies,
Inc. -- analyzes price, current yield, risk, total return and
average rate of return (average annual compounded growth rate)
over specified time periods for the mutual fund industry.
38
<PAGE>
(b) Financial publications: Business Week, Changing Times, Financial
World, Forbes, Fortune, Money, Barron's, Consumer's Digest,
Financial Times, Global Investor, Investor's Daily, Lipper
Analytical Services, Inc., Morningstar, Inc., New York Times,
Personal Investor, Wall Street Journal and Weisenberger
Investment Companies Service -- publications that rate fund
performance over specified time periods.
(c) Historical data supplied by the research departments of First
Boston Corporation, the J.P. Morgan companies, Salomon Brothers,
Merrill Lynch, Pierce, Fenner & Smith, Lehman Brothers and
Bloomberg L.P.
(d) Lipper -- Mutual Fund Performance Analysis and Lipper -- Fixed
Income Fund Performance Analysis -- measures total return and
average current yield for the mutual fund industry. Ranks
individual mutual fund performance over specified time periods,
assuming reinvestment of all distributions, exclusive of any
applicable sales charges.
(e) Mutual Fund Source Book, published by Morningstar, Inc. --
analyzes price, yield, risk and total return for equity funds.
(f) Savings and Loan Historical Interest Rates -- as published in the
U.S. Savings & Loan League Fact Book.
(g) Stocks, Bonds, Bills and Inflation, published by Hobson
Associates -- historical measure of yield, price and total return
for common and small company stock, long-term government bonds,
U.S. Treasury bills and inflation.
The following indices and averages may also be used:
(a) Composite Indices -- 70% Standard & Poor's 500 Stock Index and
30% NASDAQ Industrial Index; 35% Standard & Poor's 500 Stock
Index and 65% Salomon Brothers High Grade Bond Index; and 65%
Standard & Poor's 500 Stock Index and 35% Salomon Brothers High
Grade Bond Index.
(b) Consumer Price Index (or cost of Living Index), published by the
U.S. Bureau of Labor Statistics -- a statistical measure of
change, over time, in the price of goods and services in major
expenditure groups.
(c) Donoghue's Money Fund Average -- an average of all major money
market fund yields, published weekly for 7 and 30-day yields.
(d) Dow Jones Composite Average or its component averages -- an
unmanaged index composed of 30 blue-chip industrial corporation
stocks (Dow Jones Industrial Average), 15 utilities company
stocks and 20 transportation stocks. Comparisons of performance
assume reinvestment of dividends.
(e) EMBI+ -- Expanding on the EMBI, which includes only Bradys, the
EMBI+ includes a broader group of Brady Bonds, loans, Eurobonds
and the U.S. Dollar local markets instruments. A more
comprehensive benchmark than the EMBI, the EMBI+ covers 49
instruments from 14 countries. At $96 billion, its market cap is
nearly 50% higher than the EMBI's. The EMBI+ is not, however,
intended to replace the EMBI but rather to complement it. The
EMBI continues to represent the most liquid, most easily traded
segment of the market, including more of the assets that
investors typically hold in their portfolios. Both of these
indices are published daily.
(f) First Boston High Yield Index -- generally includes over 180
issues with an average maturity range of seven to ten years with
a minimum capitalization of $100 million. All issues are
individually trader-priced monthly.
(g) First Boston Upper/Middle Tier High Yield Index -- an unmanaged
index of bonds rated B to BBB.
(h) Goldman Sachs 100 Convertible Bond Index -- currently includes 67
bonds and 33 preferred. The original list of names was generated
by screening for convertible issues of 100 million or greater in
market capitalization. The index is priced monthly.
(i) IFC Global Total Return Composite Index -- an unmanaged index of
common stocks and includes 18 developing countries in Latin
America, East and South Asia, Europe, the Middle East and Africa
(net of dividends reinvested).
39
<PAGE>
(j) Indata Balanced-Median Index -- an unmanaged index and includes
an asset allocation of 7% cash, 39% bonds and 54% equity based on
$37.8 billion in assets among 538 portfolios for the year ended
December 31, 1995 (assumes dividends reinvested).
(k) Indata Equity-Median Stock Index -- an unmanaged index which
includes an average asset allocation of 5% cash and 95% equity
based on $30.6 billion in assets among 562 portfolios for the
year ended December 31, 1995.
(l) J.P. Morgan Emerging Markets Bond Index -- a market-weighted
index composed of all Brady bonds outstanding and includes
Argentina, Brazil, Bulgaria, Mexico, Nigeria, the Philippines,
Poland and Venezuela.
(m) J.P. Morgan Traded Global Bond Index -- an unmanaged index of
securities and includes Australia, Belgium, Canada, Denmark,
France, Germany, Italy, Japan, The Netherlands, Spain, Sweden,
United Kingdom and the United States.
(n) Lehman Brothers Aggregate Bond Index -- an unmanaged index made
up of the Government/Corporate Index, the Mortgage Backed
Securities Index and the Asset-Backed Securities Index.
(o) Lehman Brothers LONG-TERM Treasury Bond -- composed of all bonds
covered by the Lehman Brothers Treasury Bond Index with
maturities of 10 years or greater.
(p) The Lehman 7 Year Municipal Bond Index -- an unmanaged index
which consists of investment grade bonds with maturities between
6-8 years rated BAA or better. All bonds have been taken from
deals done within the last 5 years, with assets of $50 million or
larger.
(q) Lipper Capital Appreciation Index -- a composite of mutual funds
managed for maximum capital gains.
(r) Morgan Stanley Capital International Combined Far East Free
ex-Japan Index -- a market-capitalization weighted index
comprising stocks in Hong Kong, Indonesia, Korea, Malaysia,
Philippines, Singapore, Taiwan and Thailand. Korea is included
in the MSCI Combined Far East Free ex-Japan Index at 20% of its
market capitalization.
(s) Morgan Stanley Capital International EAFE Index -- an arithmetic,
market value-weighted average of the performance of over 900
securities on the stock exchanges of countries in Europe,
Australia and the Far East.
(t) Morgan Stanley Capital International Emerging Markets Global
Latin American Index -- an unmanaged, arithmetic market value
weighted average of the performance of over 196 securities on the
stock exchanges of Argentina, Brazil, Chile, Colombia, Mexico,
Peru and Venezuela (Assumes reinvestment of dividends).
(u) Morgan Stanley Capital International Europe Index -- an unmanaged
index of common stocks and includes 14 countries throughout
Europe.
(v) Morgan Stanley Capital International Japan Index -- an unmanaged
index of common stocks.
(w) Morgan Stanley Capital International Latin America Index -- a
broad-based market capitalization-weighted composite index
covering at least 60% of markets in Mexico, Argentina, Brazil,
Chile, Colombia, Peru and Venezuela (assumes dividends
reinvested).
(x) Morgan Stanley Capital International World Index -- an
arithmetic, market value-weighted average of the performance of
over 1,470 securities listed on the stock exchanges of countries
in Europe, Australia, the Far East, Canada and the United States.
(y) NASDAQ Composite Index -- an unmanaged index of common stocks.
(z) NASDAQ Industrial Index -- a capitalization-weighted index
composed of more than 3,000 domestic stocks taken from the
following industry sectors: agriculture, mining, construction,
manufacturing, electronic components, services and public
administration enterprises. It is a value-weighted index
calculated on price change only and does not include income.
40
<PAGE>
(aa) National Association of Real Estate Investment Trusts ("NAREIT")
Index -- an unmanaged market weighted index of tax qualified
REITs (excluding healthcare REITs) listed on the New York Stock
Exchange, American Stock Exchange and the NASDAQ National Market
System including dividends.
(bb) The New York Stock Exchange composite or component indices --
unmanaged indices of all industrial, utilities, transportation
and finance company stocks listed on the New York Stock Exchange.
(cc) Philadelphia Gold and Silver Index -- an unmanaged index
comprised of seven leading companies involved in the mining of
gold and silver.
(dd) Russell 2500 Index -- comprised of the bottom 500 stocks in the
Russell 1000 Index which represents the universe of stocks from
which most active money managers typically select; and all the
stocks in the Russell 2000 Index. The largest security in the
index has a market capitalization of approximately 1.3 billion.
(ee) Salomon Brothers GNMA Index -- includes pools of mortgages
originated by private lenders and guaranteed by the mortgage
pools of the Government National Association.
(ff) Salomon Brothers High Grade Corporate Bond Index -- consists of
publicly issued, non-convertible corporate bonds rated AA or AAA.
It a is value-weighted, total return index, including
approximately 800 issues with maturities of 12 years or greater.
(gg) Salomon Brothers Broad Investment Grade Bond -- a market-weighted
index that contains approximately 4700 individually priced
investment grade corporate bonds rated BBB or better, U.S.
Treasury/agency issues and mortgage pass-through securities.
(hh) Standard & Poor's 500 Stock Index or its component indices --
unmanaged index composed of 400 industrial stocks, 40 financial
stocks, 40 utilities company stocks and 20 transportation stocks.
Comparisons of performance assume reinvestment of dividends.
(ii) Standard & Poor's Small Cap 600 Index -- a capitalization-
weighted index of 600 domestic stocks having market
capitalizations which reside within the 50th and the 83rd
percentiles of the market capitalization of the entire stock
market, chosen for certain liquidity characteristics and for
industry representation.
(jj) Wilshire 5000 Equity Index or its component indices -- represents
the return on the market value of all common equity securities
for which daily pricing is available. Comparisons of performance
assume reinvestment of dividends.
In assessing such comparisons of performance an investor should keep in
mind that the composition of the investments in the reported indices and
averages is not identical to the composition of investments in the Fund's
Portfolios, that the averages are generally unmanaged, and that the items
included in the calculations of such averages may not be identical to the
formula used by the Fund to calculate its futures. In addition, there can be no
assurance that the Fund will continue this performance as compared to such other
averages.
GENERAL INFORMATION
DESCRIPTION OF SHARES AND VOTING RIGHTS
The Fund's Articles of Incorporation, as amended and restated, permit
the Directors to issue shares 34 billion of common stock, par value $.001 per
share, from an unlimited number of classes ("Portfolios") of shares. Currently
the Fund consists of shares of twenty-eight Portfolios (China Growth, Mortgage-
Backed Securities, MicroCap and International Magnum Portfolios are not
currently offering shares).
The shares of each Portfolio of the Fund are fully paid and
nonassessable, and have no preference as to conversion, exchange, dividends,
retirement or other features. The shares of each Portfolio of the Fund have no
pre-emptive rights. The shares of the Fund have non-cumulative voting rights,
which means that the holders of more than 50% of the shares voting for the
election
41
<PAGE>
of Directors can elect 100% of the Directors if they choose to do so. A
shareholder is entitled to one vote for each full share held (and a fractional
vote for each fractional share held), then standing in his name on the books of
the Fund.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
The Fund's policy is to distribute substantially all of each Portfolio's
net investment income, if any. The Fund may also distribute any net realized
capital gains in the amount and at the times that will avoid both income
(including taxable gains) taxes on it and the imposition of the federal excise
tax on income and capital gains (see discussion under "Taxes" in this Statement
of Additional Information). However, the Fund may also choose to retain net
realized capital gains and pay taxes on such gains. The amounts of any income
dividends or capital gains distributions cannot be predicted.
Any dividend or distribution paid shortly after the purchase of shares
of a Portfolio by an investor may have the effect of reducing the per share net
asset value of that Portfolio by the per share amount of the dividend or
distribution. Furthermore, such dividends or distributions, although in effect
a return of capital, are subject to income taxes for shareholders subject to tax
as set forth herein and in the applicable Prospectus.
As set forth in the Prospectuses, unless the shareholder elects
otherwise in writing, all dividends and capital gains distributions for a class
of shares are automatically received in additional shares of such class of that
Portfolio of the Fund at net asset value (as of the business day following the
record date). This automatic reinvestment of dividends and distributions will
remain in effect until the Fund is notified by the shareholder in writing at
least three days prior to the record date that either the Income Option (income
dividends in cash and capital gains distributions in additional shares at net
asset value) or the Cash Option (both income dividends and capital gains
distributions in cash) has been elected.
CUSTODY ARRANGEMENTS
Chase serves as the Fund's domestic custodian. Chase is not affiliated
with Morgan Stanley & Co. Incorporated. Morgan Stanley Trust Company, Brooklyn,
NY, acts as the Fund's custodian for foreign assets held outside the United
States and employs subcustodians who were approved by the Directors of the Fund
in accordance with Rule 17f-5 adopted by the Commission under the 1940 Act.
Morgan Stanley Trust Company is an affiliate of Morgan Stanley & Co.
Incorporated. In the selection of foreign subcustodians, the Directors consider
a number of factors, including, but not limited to, the reliability and
financial stability of the institution, the ability of the institution to
provide efficiently the custodial services required for the Fund, and the
reputation of the institution in the particular country or region.
DESCRIPTION OF SECURITIES AND RATINGS
I. DESCRIPTION OF COMMERCIAL PAPER AND BOND RATINGS
EXCERPTS FROM MOODY'S INVESTORS SERVICE, INC. ("MOODY'S") DESCRIPTION OF
BOND RATINGS: Aaa - Bonds which are rated Aaa are judged to be the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt-edge." Interest payments are protected by a large or by an
exceptionally stable margin, and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues. Aa -
Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities. Moody's
applies numerical modifiers 1, 2 and 3 in the Aa and A rating categories. The
modifier 1 indicates that the security ranks at a higher end of the rating
category, modifier 2 indicates a mid-range rating and the modifier 3 indicates
that the issue ranks at the lower end of the rating category. A - Bonds which
are rated A possess many favorable investment attributes and are to be
considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future. Baa - Bonds
which are rated Baa are considered as medium grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well. Ba - Bonds which are rated Ba are judged
to have speculative elements; their future cannot be considered as well assured.
Often the protection of interest and principal payments may be very moderate,
and thereby not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class. B - Bonds which are
rated B generally lack characteristics of the desirable investment. Assurance
of interest
42
<PAGE>
and principal payments or of maintenance of other terms of the contract over any
long period of time may be small. Caa - Bonds which are rated Caa are of poor
standing. Such issues may be in default or there may be present elements of
danger with respect to principal or interest. Ca - Bonds which are rated Ca
represent obligations which are speculative in a high degree. Such issues are
often in default or have other marked shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
EXCERPTS FROM STANDARD & POOR'S RATINGS GROUP ("S&P") DESCRIPTION OF BOND
RATINGS: AAA - Bonds rated AAA have the highest rating assigned by Standard &
Poor's to a debt obligation and indicate an extremely strong capacity to pay
principal and interest. AA - Bonds rated AA have a very strong capacity to pay
interest and repay principal and differ from the highest rated issues only to a
small degree. A - Bonds rated A have a strong capacity to pay interest and
repay principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than bonds in higher
rated categories. BBB - Debt rated BBB is regarded as having an adequate
capacity to pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for debt in this category than for debt in higher rated
categories. BB, B, CCC, CC - Debt rated BB, B, CCC and CC is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions. C - The rating C is reserved for income bonds
on which no interest is being paid. D - Debt rated D is in default, and payment
of interest and/or repayment of principal is in arrears.
DESCRIPTION OF MOODY'S RATINGS OF STATE AND MUNICIPAL NOTES: Moody's
ratings for state and municipal notes and other short-term obligations are
designated Moody's Investment Grade ("MIG"). Symbols used are as follows:
MIG-1 -- best quality, enjoying strong protection from established cash flows of
funds for their servicing or from established broad-based access to the market
for refinancing, or both; MIG-2 -- high quality with margins of protection ample
although not so large as in the preceding group; MIG-3 - favorable quality, with
all security elements accounted for but lacking the undeniable strength of the
preceding grades.
DESCRIPTION OF MOODY'S HIGHEST COMMERCIAL PAPER RATING: Prime-1 ("P1")
- -- Judged to be of the best quality. Their short-term debt obligations carry
the smallest degree of investment risk.
EXCERPT FROM S&P'S RATING OF MUNICIPAL NOTE ISSUES: S-1+ -- very strong
capacity to pay principal and interest; SP-2 -- strong capacity to pay principal
and interest.
DESCRIPTION OF S&P'S HIGHEST COMMERCIAL PAPER RATINGS: A-1+ -- this
designation indicates the degree of safety regarding timely payment is
overwhelming. A-1 -- this designation indicates the degree of safety regarding
timely payment is very strong.
II. DESCRIPTION OF U.S. GOVERNMENT SECURITIES
The term "U.S. Government securities" refers to a variety of securities
which are issued or guaranteed by the U.S. Government, and by various
instrumentalities which have been established or sponsored by the U.S.
Government.
U.S. Treasury securities are backed by the "full faith and credit" of
the United States. Securities issued or guaranteed by Federal agencies and U.S.
Government sponsored instrumentalities may or may not be backed by the full
faith and credit of the United States. In the case of securities not backed by
the full faith and credit of the United States, the investor must look
principally to the agency or instrumentality issuing or guaranteeing the
obligation for ultimate repayment, and may not be able to assert a claim against
the United States itself in the event the agency or instrumentality does not
meet its commitment. Agencies which are backed by the full faith and credit of
the United States include the Export-Import Bank, Farmers Home Administration,
Federal Financing Bank, and others. Certain agencies and instrumentalities,
such as the Government National Mortgage Associates, are, in effect, backed by
the full faith and credit of the United States through provisions in their
charters that they may make "indefinite and unlimited" drawings on the Treasury,
if needed to service debt. Debt from certain other agencies and
instrumentalities, including the Federal Home Loan Bank and Federal National
Mortgage Association, are not guaranteed by the United States, but those
institutions are protected by the discretionary authority for the U.S. Treasury
to purchase certain amounts of their securities to assist the institution in
meeting its debt obligations. However, the U.S. Treasury has no lawful
obligation to assume the financial liabilities of these agencies or others.
Finally, other agencies and instrumentalities, such as the Farm Credit System
and the Federal Home Loan Mortgage Corporation, are federally chartered
institutions under Government supervision, but their debt securities are backed
only by the creditworthiness of those institutions, not the U.S. Government.
43
<PAGE>
Some of the U.S. Government agencies that issue or guarantee securities
include the Export-Import Bank of the United States, Farmers Home
Administration, Federal Housing Administration, Maritime Administration, Small
Business Administration, and the Tennessee Valley Authority.
An instrumentality of the U.S. Government is a Government agency
organized under Federal charter with Government supervision. Instrumentalities
issuing or guaranteeing securities include, among others, Federal Home Loan
Banks, the Federal Land Banks, Central Bank for Cooperatives, Federal Immediate
Credit Banks, and the Federal National Mortgage Association.
III. DESCRIPTION OF MUNICIPAL BONDS
Municipal Bonds generally include debt obligations issued by states and
their political subdivisions, and duly constituted authorities and corporations,
to obtain funds to construct, repair or improve various public facilities such
as airports, bridges, highways, hospitals, housing, schools, streets and water
and sewer works. Municipal Bonds may also be issued to refinance outstanding
obligations as well as to obtain funds for general operating expenses and for
loans to other public institutions and facilities.
The two principal classifications of Municipal Bonds are "general
obligation" and "revenue" or "special tax" bonds. General obligation bonds are
secured by the issuer's pledge of its full faith, credit and taxing power for
the payment of principal and interest. Revenue or special tax bonds are payable
only from the revenues derived from a particular facility or class of facilities
or, in some cases, from the proceeds of a special excise or other tax, but not
from general tax revenues. The Municipal Bond Portfolio and the Municipal Money
Market Portfolio may also invest in tax-exempt industrial development bonds,
short-term municipal obligations, project notes, demand notes and tax-exempt
commercial paper in accordance with the Portfolio's investment objectives and
policies.
Industrial revenue bonds (i.e., private activity bonds) in most cases
are revenue bonds and generally do not have the pledge of the credit of the
issuer. The payment of the principal and interest on such industrial revenue
bonds is dependent solely on the ability of the user of the facilities financed
by the bonds to meet its financial obligations and the pledge, if any, of real
and personal property so financed as security for such payment. Short-term
municipal obligations issued by states, cities, municipalities or municipal
agencies include Tax Anticipation Notes, Revenue Anticipation Notes, Bond
Anticipation Notes, Construction Loan Notes and Short-Term Discount Notes.
Project Notes are instruments guaranteed by the Department of Housing and Urban
Development but issued by a state or local housing agency. While the issuing
agency has the primary obligation on such Project notes, they are also secured
by the full faith and credit of the United States.
Note obligations with demand or put options may have a stated maturity
in excess of one year, but allow any holder to demand payment of principal plus
accrued interest upon a specified number of days' notice. Frequently, such
obligations are secured by letters of credit or other credit support
arrangements provided by banks. The issuer of such notes normally has a
corresponding right, after a given period, to repay in its discretion the
outstanding principal of the notes plus accrued interest upon a specific number
of days' notice to the bondholders. The interest rate on a demand note may be
based upon a known lending rate, such as a bank's prime rate, and be adjusted
when such rate changes, or the interest rate on a demand note may be a market
rate that is adjusted at specified intervals. The demand notes in which the
Municipal Money Market Portfolio will invest are payable on not more than one
year's notice.
The yields of Municipal Bonds depend on, among other things, general
money market conditions, conditions in the Municipal Bond market, the size of a
particular offering, the maturity of the obligation, and the rating of the
issue. The ratings of Moody's and S&P represent their opinions of the quality
of the Municipal Bonds. It should be emphasized that such ratings are general
and are not absolute standards of quality. Consequently, Municipal Bonds with
the same maturity, coupon and rating may have different yields, while Municipal
Bonds of the same maturity and coupon, but with different ratings, may have the
same yield. It will be the responsibility of the Adviser to appraise
independently the fundamental quality of the bonds held by the Municipal Bond
Portfolio and the Municipal Money Market Portfolio.
Municipal Bonds are sometimes purchased on a "when issued" basis meaning
the buyer has committed to purchasing certain specified securities at an
agreed-upon price when they are issued. The period between commitment date and
issuance date can be a month or more. It is possible that the securities will
never be issued and the commitment canceled.
From time to time proposals have been introduced before Congress to
restrict or eliminate the Federal income tax exemption for interest on Municipal
Bonds. Similar proposals may be introduced in the future. If any such proposal
were enacted, it might restrict or eliminate the ability of either the Municipal
Bond Portfolio or the Municipal Money Market Portfolio to achieve its investment
objective. In that event, the Fund's Directors and officers would reevaluate
its investment objective and policies and consider recommending to its
shareholders changes in such objective and policies.
44
<PAGE>
Similarly, from time to time proposals have been introduced before State
and local legislatures to restrict or eliminate the State and local income tax
exemption (to the extent such an exemption applies, which may not apply in all
cases) for interest on Municipal Bonds. Similar proposals may be introduced in
the future. If any such proposal were enacted, it might restrict or eliminate
the ability of either of the Municipal Bond Portfolio or the Municipal Money
Market Portfolio to achieve its investment objective. In that event, the Fund's
Directors and officers would reevaluate the Portfolio's investment objective and
policies and consider recommending to its shareholders changes in such objective
and policies.
IV. DESCRIPTION OF MORTGAGE-BACKED SECURITIES
"Mortgage-Backed Securities" are securities that, directly or
indirectly, represent a participation in, or are secured by and payable from,
mortgage loans on real property. Mortgage-backed securities include
collateralized mortgage obligations ("CMOs"), pass-through securities issued or
guaranteed by agencies or instrumentalities of the U.S. government or by private
sector entities.
COLLATERALIZED MORTGAGE OBLIGATIONS. Collateralized mortgage
obligations ("CMOs") are debt obligations or multiclass pass-through
certificates issued by agencies or instrumentalities of the U.S. government or
by private originators or investors in mortgage loans. They are backed by
Mortgage Pass-Through Securities (discussed below) or whole loans (all such
assets, the "Mortgage Assets") and are evidenced by a series of bonds or
certificates issued in multiple classes or "tranches." The principal and
interest on the underlying Mortgage Assets may be allocated among the several
classes of a series of CMOs in many ways.
CMOs may be issued by agencies or instrumentalities of the U.S.
government, or by private originators of, or investors in, mortgage loans,
including savings and loan associations, mortgage bankers, commercial banks,
investment banks and special purpose subsidiaries of the foregoing. CMOs that
are issued by private sector entities and are backed by assets lacking a
guarantee of an entity having the credit status of a governmental agency or
instrumentality are generally structured with one or more types of credit
enhancement as described below. An issuer of CMOs may elect to be treated, for
federal income tax purposes, as a Real Estate Mortgage Investment Conduit (a
"REMIC"). An issuer of CMOs issued after 1991 must elect to be treated as a
REMIC or it will be taxable as a corporation under rules regarding taxable
mortgage pools.
In a CMO, a series of bonds or certificates are issued in multiple
classes. Each class of CMOs, often referred to as a "tranche," may be issued
with a specific fixed or floating coupon rate and has a stated maturity or final
scheduled distribution date. Principal prepayments on the underlying Mortgage
Assets may cause the CMOs to be retired substantially earlier than their stated
maturities or final scheduled distribution dates. Interest is paid or accrues
on CMOs on a monthly, quarterly or semi-annual basis. The principal of and
interest on the Mortgage Assets may be allocated among the several classes of a
CMO in many ways. The general goal in allocating cash flows on Mortgage Assets
to the various classes of a CMO is to create certain tranches on which the
expected cash flows have a higher degree of predictability than the underlying
Mortgage Assets. As a general matter, the more predictable the cash flow is on
a particular CMO tranche, the lower the anticipated yield will be on that
tranche at the time of issuance relative to prevailing market yields on Assets.
As part of the process of creating more predictable cash flows on certain
tranches of a CMO, one or more tranches generally must be created that absorb
most of the changes in the cash flows on the underlying Mortgage Assets. The
yields on these tranches are generally higher than prevailing market yields on
Mortgage-Backed Securities with similar average lives. Because of the
uncertainty of the cash flows on these tranches, the market prices of and yields
on these tranches are more volatile.
Included within the category of CMOs are PAC Bonds. PAC Bonds are a
type of CMO tranche or series designed to provide relatively predictable
payments of principal provided that, among other things, the actual prepayment
experience on the underlying mortgage loans falls within a predefined range. If
the actual prepayment experience on the underlying mortgage loans is at a rate
faster or slower than the predefined range or if deviations from other
assumptions occur, principal payments on the PAC Bond may be earlier or later
than predicted. The magnitude of the predefined range varies from one PAC Bond
to another; a narrower range increases the risk that prepayments on the PAC Bond
will be greater or smaller than predicted. Because of these features, PAC Bonds
generally are less subject to the risks of prepayment than are other types of
mortgage-backed securities.
MORTGAGE PASS-THROUGH SECURITIES. Mortgage pass-through securities in
which the Mortgage-Backed Securities Portfolio may invest include pass-through
securities issued or guaranteed by agencies or instrumentalities of the U.S.
government or by private sector entities. Mortgage pass-through securities
issued or guaranteed by private sector originators of or investors in mortgage
loans and are structured similarly to governmental pass-through securities.
Because private pass-throughs typically lack a guarantee by an entity having the
credit status of a governmental agency or instrumentality, they are generally
structured with one or more types of credit enhancement described below. FNMA
and FHLMC obligations are not backed by the full faith and credit of the U.S.
government as GNMA certificates are, but FNMA and FHLMC securities are supported
by the instrumentalities' right to borrow from the United States Treasury. Each
of GNMA, FNMA and FHLMC guarantees timely distributions of interest to
certificate holders.
45
<PAGE>
Each of GNMA and FNMA also guarantees timely distributions of scheduled
principal. FHLMC has in the past guaranteed only the ultimate collection of
principal of the underlying mortgage loan; however, FHLMC now issued Mortgage-
Backed Securities (FHLMC Gold Pcs) which also guarantee timely payment of
monthly principal reductions. REFCORP obligations are backed, as to principal
payments, by zero coupon U.S. Treasury bonds, and as to interest payment,
ultimately by the U.S. Treasury. Obligations issued by such U.S. governmental
agencies and instrumentalities are described more fully below.
GINNIE MAE CERTIFICATES. Ginnie Mae is a wholly-owned corporate
instrumentality of the United States within the Department of Housing and Urban
Development. The National Housing Act of 1934, as amended (the "Housing Act"),
authorizes Ginnie Mae to guarantee the timely payment of the principal of and
interest on certificates that are based on and backed by a pool of mortgage
loans insured by the Federal Housing Administration under the Housing Act, or
Title V of the Housing Act of 1949 ("FHA Loans"), or guaranteed by the
Department of Veterans Affairs under the Servicemen's Readjustment Act of 1944,
as amended ("VA Loans"), or by pools of other eligible mortgage loans. The
Housing Act provides that the full faith and credit of the United States
government is pledged to the payment of all amounts that may be required to be
paid under any guaranty. In order to meet its obligations under such guaranty,
Ginnie Mae is authorized to borrow from the United States Treasury with no
limitations as to amount.
Each Ginnie Mae Certificate will represent a pro rata interest in one or
more of the following types of mortgage loans: (i) fixed rate level payment
mortgage loans; (ii) fixed rate graduated payment mortgage loans; (iii) fixed
rate growing equity mortgage loans; (iv) fixed rate mortgage loans secured by
manufactured (mobile) homes; (v) mortgage loans on multi-family residential
properties under construction; (vi) mortgage loans on completed multi-family
projects; (vii) fixed rate mortgage loans as to which escrowed funds are used to
reduce the borrower's monthly payments during the early years of the mortgage
loans ("buydown" mortgage loans); (viii) mortgage loans that provide for
adjustments in payments based on periodical changes in interest rates or in
other payment terms of the mortgage loans; and (ix) mortgage-backed serial
notes. All of these mortgage loans will be FHA Loans or VA Loans and, except as
otherwise specified above, will be fully-amortizing loans secured by first liens
on one- to four-family housing units.
FANNIE MAE CERTIFICATES. Fannie Mae is a federally chartered and
privately owned corporation organized and existing under the Federal National
Mortgage Association Charter Act of 1938. The obligations of Fannie Mae are not
backed by the full faith and credit of the United States government.
Each Fannie Mae Certificate will represent a pro rata interest in one or
more pools of FHA Loans, VA Loans or conventional mortgage loans (i.e., mortgage
loans that are not insured or guaranteed by any governmental agency) of the
following types: (i) fixed rate level payment mortgage loans; (ii) fixed rate
growing equity mortgage loans; (iii) fixed rate graduated payment mortgage
loans; (iv) variable rate California mortgage loans; (v) other adjustable rate
mortgage loans; and (vi) fixed rate and adjustable mortgage loans secured by
multi-family projects.
FREDDIE MAC CERTIFICATES. Freddie Mac is a corporate instrumentality of
the United States created pursuant to the Emergency Home Finance Act of 1970, as
amended (the "FHLMC Act"). The obligations of Freddie Mac are obligations
solely of Freddie Mac and are not backed by the full faith and credit of the
U.S. government.
Freddie Mac Certificates represent a pro rata interest in a group of
mortgage loans (a "Freddie Mac Certificate group") purchased by Freddie Mac.
The mortgage loans underlying the Freddie Mac Certificates will consist of fixed
rate or adjustable rate mortgage loans with original terms to maturity of
between ten and thirty years, substantially all of which are secured by first
liens on one- to four-family residential properties or multi-family projects.
Each mortgage loan must meet the applicable standards set forth in the FHLMC
Act. A Freddie Mac Certificate group may include whole loans, participation
interests in whole loans and undivided interests in whole loans and
participations comprising another Freddie Mac Certificate group.
CREDIT ENHANCEMENT. Mortgage-backed securities are often backed by a
pool of assets representing the obligations of a number of different parties.
To lessen the effect of failure by obligors on underlying assets to make
payments, such securities may contain elements of credit support. Such credit
support falls into two categories: (i) liquidity protection and (ii) protection
against losses resulting from ultimate default by an obligor on the underlying
assets. Liquidity protection generally refers to the provision of advances,
typically by the entity administering the pool of assets, to ensure that the
pass-through of payments due on the underlying pool occurs in a timely fashion.
Protection against losses resulting from ultimate default enhances the
likelihood of ultimate payment of the obligations on at least a portion of the
assets in the pool. Such protection may be provided through guarantees,
insurance policies or letters of credit obtained by the issuer or sponsor from
third parties (referred to herein as "third party credit support"), through
various means of structuring the transaction or through a combination of such
approaches. The Mortgage-Backed Securities Portfolio will not pay any
additional fees for such credit support, although the existence of credit
support may increase the price the Portfolio pays for a security.
46
<PAGE>
The ratings of mortgage-backed securities for which third-party credit
enhancement provides liquidity protection or protection against losses from
default are generally dependent upon the continued creditworthiness of the
provider of the credit enhancement. The ratings of such securities could be
subject to reduction in the event of deterioration in the creditworthiness of
the credit enhancement provider even in cases where the delinquency and loss
experience on the underlying pool of assets is better than expected.
Examples of credit support arising out of the structure of the
transaction include "senior-subordinated securities" (multiple class securities
with one or more classes subordinate to other classes as to the payment of
principal thereof and interest thereon, with defaults on the underlying assets
being borne first by the holders of the most subordinated class), creation of
"reserve funds" (where cash or investments, sometimes funded from a portion of
the payments on the underlying assets, are held in reserve against future
losses) and "over-collateralization" (where the scheduled payments on, or the
principal amount of, the underlying assets exceed those required to make payment
of the securities and pay any servicing or other fees). The degree of credit
support provided for each security is generally based on historical information
with respect to the level of credit risk associated with the underlying assets.
Delinquency or loss in excess of that which is anticipated could adversely
affect the return on an investment in such a security.
V. FOREIGN INVESTMENTS
The Active Country Allocation, International Equity, International Fixed
Income, Global Equity, Global Fixed Income, Asian Equity, European Equity,
Japanese Equity, International Small Cap, Latin American and China Growth
Portfolios will invest, and the Emerging Growth, Emerging Markets, Emerging
Markets Debt, Value Equity, Equity Growth, MicroCap, Balanced, Small Cap Value
Equity, International Magnum, Fixed Income, High Yield and Gold Portfolios may
invest, in securities of foreign issuers. Investors should recognize that
investing in such foreign securities involves certain special considerations
which are not typically associated with investing in U.S. issuers. For a
description of the effect on the Portfolios of currency exchange rate
fluctuation, see "Investment Objectives and Policies -- Forward Foreign Currency
Exchange Contracts" above. As foreign issuers are not generally subject to
uniform accounting, auditing and financial reporting standards and may have
policies that are not comparable to those of domestic issuers, there may be less
information available about certain foreign companies than about domestic
issuers. Securities of some foreign issuers are generally less liquid and more
volatile than securities of comparable domestic issuers. There is generally
less government supervision and regulation of stock exchanges, brokers and
listed issuers than in the U.S. In addition, with respect to certain foreign
countries, there is the possibility of expropriation or confiscatory taxation,
political or social instability, or diplomatic developments which could affect
U.S. investments in those countries. Foreign securities not listed on a
recognized domestic or foreign exchange are regarded as not readily marketable
and therefore such investments will be limited to 15% of a Portfolio's net asset
value at the time of purchase.
Although the Portfolios will endeavor to achieve the most favorable
execution costs in their portfolio transactions, fixed commissions on many
foreign stock exchanges are generally higher than negotiated commissions on U.S.
exchanges.
Certain foreign governments levy withholding or other taxes on dividend
and interest income. Although in some countries a portion of these taxes are
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income received from investments in such countries. Except in the case of
the International Equity, Global Equity, European Equity, Japanese Equity, Asian
Equity, Global Fixed Income, International Fixed Income, International Magnum,
International Small Cap, Latin American and China Growth Portfolios, it is not
expected that a Portfolio or its shareholders would be able to claim a credit
for U.S. tax purposes with respect to any such foreign taxes. However, these
foreign withholding taxes may not have a significant impact on such Portfolios,
because each Portfolio's investment objective is to seek long-term capital
appreciation and any dividend or interest income should be considered
incidental.
FINANCIAL STATEMENTS
The following are (i) the audited Financial Statements for the fiscal year ended
December 31, 1995 and the Report of Price Waterhouse LLP, independent
accountants, dated February 9, 1996 relating to the financial statements and
financial highlights of each of the Portfolios except for the Mortgage-Backed
Securities, China Growth, MicroCap and International Magnum Portfolios, which
had not commenced operation as of December 31, 1995.
47
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE ACTIVE COUNTRY ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (89.5%)
AUSTRALIA (1.8%)
15,500 Amcor Ltd......................................... $ 109
8,800 Ampolex Ltd....................................... 19
14,600 Australian National Industries Ltd................ 11
24,900 Boral Ltd. (Bonus Shares Plan).................... 63
6,200 Brambles Industries Ltd........................... 69
46,670 Broken Hill Proprietary Co., Ltd.................. 659
16,100 Burns, Philip & Co., Ltd.......................... 36
7,981 Coca-Cola Amatil Ltd.............................. 64
32,918 Coles Myer Ltd.................................... 103
16,000 CRA Ltd........................................... 235
**+1,200 CRA Ltd. (Bonus Shares)........................... 17
25,100 CSR Ltd........................................... 82
47,400 Fosters Brewing Corp.............................. 78
+4,278 Goldfields Ltd.................................... 11
33,300 Goodman Fielder Ltd............................... 33
8,800 ICI Australia Ltd................................. 67
6,833 Lend Lease Corp., Ltd............................. 99
41,019 MIM Holdings Ltd.................................. 57
35,518 National Australia Bank Ltd....................... 319
8,200 Newcrest Mining Ltd............................... 34
47,600 News Corp., Ltd................................... 254
22,073 North Broken Hill Peko Ltd........................ 62
28,900 Pacific Dunlop Ltd................................ 68
24,200 Pioneer International Ltd......................... 62
7,700 Renison Goldfields Consolidated Ltd............... 38
15,400 Santos Ltd........................................ 45
18,400 Southcorp Holdings Ltd............................ 43
+11,900 TNT Ltd........................................... 16
26,000 Western Mining Corp. Holdings Ltd................. 167
43,900 Westpac Banking Corp.............................. 194
----------
3,114
----------
BELGIUM (1.8%)
120 Bekaert S.A....................................... 99
200 Cimenteries CBR................................... 81
2,800 Delhaize Freres et Cie, 'Le Lion' S.A............. 116
2,400 Electrabel S.A.................................... 571
500 Electrabel S.A. (New)............................. 119
1,700 Fortis AG......................................... 207
108 Fortis AG VVPR (New).............................. 13
785 Generale de Banque S.A............................ 278
1,375 Gevaert Photo-Producten S.A....................... 85
299 Glaverbel S.A..................................... 32
50 Glaverbel S.A. VVPR (New)......................... --
1,250 Groupe Bruxelles Lambert S.A...................... 173
700 Kredietbank S.A................................... 191
1,240 Petrofina S.A..................................... 380
675 Reunies Electrobel & Tractebel S.A................ 279
700 Royale Belge...................................... 140
450 Solvay et Cie S.A................................. 243
+1,350 Union Miniere S.A................................. 90
----------
3,097
----------
BRAZIL (0.5%)
935,000 Cia Paulista de Forca E Luz....................... 45
2,211,000 Cia Siderurgica Nacional.......................... 46
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
2,721,000 Eletrobras........................................ $ 736
425,000 Light Servicos de Eletricidade.................... 136
----------
963
----------
FRANCE (3.5%)
600 Accor S.A......................................... 78
2,800 Alcatel Alsthom................................... 241
3,100 AXA S.A........................................... 209
3,800 Banque Nationale de Paris......................... 171
400 BIC Corp.......................................... 41
600 Bouygues.......................................... 60
450 Canal Plus........................................ 84
500 Carrefour Supermarch S.A.......................... 303
1,700 Casino............................................ 49
150 Chargeurs S.A..................................... 30
550 Cie Bancaire S.A.................................. 62
1,750 Cie de Saint Gobain............................... 194
3,400 Cie de Suez S.A................................... 140
2,500 Cie Financiere de Paribas S.A., Class A........... 137
2,300 Cie Generale des Eaux............................. 230
***5,100 Elf Aquitaine..................................... 376
700 Eridania Beghin-Say S.A........................... 120
1,450 Groupe Danone..................................... 239
1,150 Havas S.A......................................... 91
2,265 Lafarge Coppee S.A................................ 146
1,300 L'Air Liquide..................................... 215
550 Legrand........................................... 85
1,300 L'Oreal........................................... 348
1,750 LVMH Moet Hennessy Louis Vuitton.................. 365
1,400 Lyonnaise des Eaux................................ 135
2,500 Michelin CGDE, Class B............................ 100
1,200 Pernod-Ricard..................................... 68
1,100 Peugeot S.A....................................... 145
400 Pinault-Printemps S.A............................. 80
350 Promodes.......................................... 82
6,000 Rhone-Poulenc S.A., Class A....................... 129
90 SAGEM............................................. 51
250 Saint Louis....................................... 66
***2,090 Sanofi............................................ 134
2,700 Schneider S.A..................................... 92
588 Simco S.A......................................... 56
62 Simco S.A. RFD.................................... 5
100 Societe Eurafrance S.A............................ 34
1,700 Societe Generale.................................. 210
2,900 Thomson CSF....................................... 65
4,200 Total S.A., Class B............................... 284
5,800 Union des Assurances de Paris..................... 151
+5,300 Usinor Sacilor.................................... 69
----------
5,970
----------
GERMANY (5.1%)
1,350 AGIV AG........................................... 29
550 Allianz AG........................................ 1,080
100 AMB Aachener & Muenchener Beteiligungs AG......... 72
100 Asko Deutsche Kaufhaus AG......................... 52
1,650 BASF AG........................................... 372
1,850 Bayer AG.......................................... 491
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Active Country Allocation Portfolio
5
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
GERMANY (CONT.)
6,100 Bayerische Hypotheken und Wechsel Bank AG......... $ 154
6,250 Bayerische Vereinsbank AG......................... 187
100 Beiersdorf AG..................................... 69
100 Bilfinger & Berger AG............................. 38
150 Brau Und Brunnen AG............................... 23
+450 Bremer Vulkan Verbund AG.......................... 13
50 CKAG Colonia Konzern AG........................... 42
2,750 Continental AG.................................... 39
1,250 Daimler-Benz AG................................... 631
250 Degussa AG........................................ 84
12,300 Deutsche Bank AG.................................. 584
10,600 Dresdner Bank AG.................................. 284
150 Heidelberger Zement AG............................ 94
200 Hochtief AG....................................... 86
300 Karstadt AG....................................... 123
200 Kaufhof Holding AG................................ 61
+1,300 Kloeckner-Humboldt-Deutz AG....................... 8
250 Linde AG.......................................... 148
900 Lufthansa AG...................................... 125
250 MAN AG............................................ 69
1,000 Mannesmann AG..................................... 318
+4,300 Merck KGAA........................................ 175
+200 Muenchener Rueckver AG (Registered)............... 431
+9 Muenchener Rueckver AG RFD (New).................. 19
450 Preussag AG....................................... 127
850 RWE AG............................................ 309
1,550 SAP AG............................................ 240
1,800 Schering AG....................................... 120
1,450 Siemens AG........................................ 797
+850 Thyssen AG........................................ 155
12,450 Veba AG........................................... 533
550 Viag AG........................................... 227
700 Volkswagen AG..................................... 235
----------
8,644
----------
HONG KONG (7.1%)
+48,000 Applied International Holdings.................... 4
60,438 Bank of East Asia Ltd............................. 217
227,000 Cathay Pacific Airways Ltd........................ 346
170,000 Cheung Kong Holdings Ltd.......................... 1,036
153,000 China Light & Power Co., Ltd...................... 704
124,000 Chinese Estates Holdings.......................... 81
60,000 Dickson Concepts International Ltd................ 56
48,000 Giordano Holdings Ltd............................. 41
**96,000 Hang Lung Development Co.......................... 153
148,200 Hang Seng Bank Ltd................................ 1,327
14,800 Hong Kong Aircraft Engineering Co., Ltd........... 38
150,000 Hong Kong & China Gas Co., Ltd.................... 242
99,000 Hong Kong & Shanghai Hotel Ltd.................... 143
855,487 Hong Kong Telecommunications Ltd.................. 1,527
341,198 Hopewell Holdings Ltd............................. 196
278,000 Hutchison Whampoa Ltd............................. 1,693
80,000 Hysan Development Co., Ltd........................ 212
30,000 Johnson Electric Holdings Ltd..................... 54
45,000 Miramar Hotel & Investment Ltd.................... 95
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
114,656 New World Development Co., Ltd.................... $ 500
110,000 Oriental Press Group Ltd.......................... 33
30,500 Peregrine Investment Holdings Ltd................. 39
84,340 Shangri-La Asia Ltd............................... 103
126,000 Shun Tak Holdings Ltd............................. 89
144,000 South China Morning Post Holdings................. 88
80,000 Stelux Holdings Ltd............................... 20
177,000 Sun Hung Kai Properties Ltd....................... 1,448
124,000 Swire Pacific Ltd., Class A....................... 962
33,000 Television Broadcasts Ltd......................... 118
168,000 Wharf Holdings Ltd................................ 560
11,800 Wing Lung Bank Ltd................................ 66
27,000 Winsor Industrial Corp............................ 23
----------
12,214
----------
INDONESIA (2.2%)
**212,000 Bank Dagang Nasional (Foreign).................... 174
**761,000 Barito Pacific Timber (Foreign)................... 557
**372,000 Gadjah Tunggal (Foreign).......................... 207
**212,000 Hanajaya Mandala Sampoerna (Foreign).............. 2,207
**248,000 Jakarta International Hotel & Development
(Foreign)....................................... 304
**27,000 Matahari Putra Prima (Foreign).................... 48
+**17,000 Pan Brothers Tex (Foreign)........................ 4
**104,000 Sinar Mas Agro (Foreign).......................... 58
**95,000 United Tractors (Foreign)......................... 179
----------
3,738
----------
ITALY (1.8%)
22,770 Assicurazioni Generali S.p.A...................... 551
45,000 Banca Commerciale Italiana........................ 96
14,000 Banco Ambrosiano Ven.............................. 38
5,000 Benetton Group S.p.A.............................. 60
3,000 Cartiere Burgo.................................... 15
65,500 Credito Italiano.................................. 76
18,000 Edison S.p.A...................................... 78
+2,000 Falck............................................. 5
89,000 Fiat S.p.A........................................ 289
22,000 Fiat S.p.A. Di Risp (NCS)......................... 39
12,500 Fidis............................................. 24
+6,000 Impregilo S.p.A................................... 5
17,400 Instituto Mobiliare Italiano...................... 110
22,000 Istituto Bancario San Paolo....................... 130
113,700 Istituto Nazionale delle Assicurazioni............ 151
3,250 Italcementi....................................... 8
7,250 Italcementi Di Risp............................... 43
19,000 Italgas........................................... 58
10,900 Magneti Marelli S.p.A............................. 13
14,500 Mediobanca S.p.A.................................. 100
+150,000 Montedison S.p.A.................................. 101
+20,000 Montedison S.p.A. Di Risp (NCS)................... 12
+106,250 Olivetti S.p.A.................................... 85
35,600 Parmalat Finanziaria S.p.A........................ 31
+45,000 Pirelli S.p.A..................................... 58
7,150 R.A.S. S.p.A...................................... 81
3,100 R.A.S. S.p.A Di Risp (NCS)........................ 19
6,000 Rinascente........................................ 36
+2,000 Saffa S.p.A....................................... 5
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Active Country Allocation Portfolio
6
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
ITALY (CONT.)
3,500 SAI............................................... $ 36
12,500 Saipem............................................ 29
3,000 Sasib............................................. 13
7,000 Sirti S.p.A....................................... 39
+20,000 SNIA BPD S.p.A.................................... 17
+183,700 Telecom Italia Mobile S.p.A....................... 323
180,000 Telecom Italia S.p.A.............................. 280
45,000 Telecom Italia S.p.A. Di Risp (NCS)............... 55
----------
3,109
----------
JAPAN (41.9%)
4,000 Advantest Corp.................................... 205
44,000 Ajinomoto Co...................................... 490
22,000 Aoki Corp......................................... 92
3,000 Aoyama Trading Co................................. 96
89,000 Asahi Bank Ltd.................................... 1,121
22,000 Asahi Breweries Ltd............................... 260
66,000 Asahi Chemical Industry Co., Ltd.................. 505
66,000 Asahi Glass Co., Ltd.............................. 735
66,000 Bank of Tokyo..................................... 1,157
22,000 Bridgestone Co.................................... 350
62,000 Canon, Inc........................................ 1,123
34,000 Casio Computer Co................................. 333
36,000 Chiba Bank........................................ 324
9,000 Chiyoda Corp...................................... 89
22,000 Chugai Pharmaceuticals Co......................... 211
34,000 Citizen Watch Co., Ltd............................ 260
31,000 Daiei Inc......................................... 375
102,000 Dai-Ichi Kangyo Bank.............................. 2,006
22,000 Daikin Industries Ltd............................. 215
44,000 Dai Nippon Printing Co., Ltd...................... 746
+10,000 Daishowa Paper Manufacturing Co., Ltd............. 78
22,000 Daiwa House Industry.............................. 362
44,000 Daiwa Securities Co., Ltd......................... 673
15,000 Ebara Corp........................................ 220
10,300 Fanuc............................................. 446
100,000 Fuji Bank......................................... 2,208
32,000 Fuji Photo Film Ltd............................... 924
123,000 Fujitsu Ltd....................................... 1,370
36,000 Furukawa Electric Co.............................. 176
44,000 Hankyu Corp....................................... 241
22,000 Hazama Corp....................................... 94
175,000 Hitachi Ltd....................................... 1,763
57,000 Honda Motor Co.................................... 1,176
71,000 Industrial Bank of Japan.......................... 2,152
11,000 Ito-Yokado Co., Ltd............................... 678
+89,000 Japan Airlines Co................................. 591
56,000 Japan Energy Corp................................. 188
24,000 Joyo Bank......................................... 193
18,000 Jusco Co., Ltd.................................... 469
44,000 Kajima Corp....................................... 435
31,928 Kansai Electric Power Co.......................... 773
44,000 Kao Corp.......................................... 546
114,000 Kawasaki Steel Corp............................... 398
66,000 Kinki Nippon Railway.............................. 499
44,000 Kirin Brewery Co., Ltd............................ 520
+133,000 Kobe Steel Ltd.................................... 411
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
94,000 Komatsu Ltd....................................... $ 774
66,000 Kubota Corp....................................... 425
44,000 Kumagai Gumi Co................................... 177
7,000 Kyocera Ltd....................................... 520
22,000 Kyowa Hakko Kogyo................................. 208
12,000 Kyushu Matsushita Electric........................ 207
17,000 Makita Corp....................................... 272
66,000 Marubeni Corp..................................... 357
20,000 Marui Co., Ltd.................................... 416
90,000 Matsushita Electric Industries Ltd................ 1,464
66,000 Mitsubishi Chemical Corp.......................... 321
62,000 Mitsubishi Corp................................... 763
78,000 Mitsubishi Electric Corp.......................... 561
48,000 Mitsubishi Estate Co., Ltd........................ 600
121,000 Mitsubishi Heavy Industries Ltd................... 964
45,000 Mitsubishi Materials Corp......................... 233
43,000 Mitsubishi Trust & Banking Co..................... 716
66,000 Mitsui & Co....................................... 579
+44,000 Mitsui Engineering & Shipbuilding................. 122
37,000 Mitsui Fudosan Co................................. 455
25,000 Mitsukoshi Ltd.................................... 235
5,000 Mochida Pharmaceutical............................ 69
23,000 Murata Manufacturing Co., Ltd..................... 846
91,000 NEC Corp.......................................... 1,111
44,000 New Oji Paper Co., Ltd............................ 398
22,000 NGK Insulators.................................... 219
22,000 Nippon Denso Co., Ltd............................. 411
44,000 Nippon Express Co., Ltd........................... 424
22,000 Nippon Fire & Marine Insurance Co................. 149
22,000 Nippon Light Metal................................ 126
22,000 Nippon Meat Packers, Inc.......................... 320
66,000 Nippon Oil Co..................................... 414
167,000 Nippon Steel Co................................... 573
66,000 Nippon Yusen...................................... 383
84,000 Nissan Motor Co................................... 645
+129,000 NKK Corp.......................................... 347
66,000 Nomura Securities Co.............................. 1,438
44,000 Odakyu Electric Railway........................... 300
30,000 Olympus Optical Co., Ltd.......................... 291
133,000 Osaka Gas Co...................................... 460
22,000 Penta-Ocean Construction.......................... 170
18,000 Pioneer Electric Corp............................. 329
111,000 Sakura Bank....................................... 1,408
22,000 Sankyo Co., Ltd................................... 494
66,000 Sanyo Electric Co., Ltd........................... 380
5,000 Secom Co.......................................... 348
5,300 Sega Enterprises.................................. 293
22,000 Sekisui House Co., Ltd............................ 281
12,000 Seven-Eleven Japan................................ 846
73,000 Sharp Corp........................................ 1,167
6,000 Shimano, Inc...................................... 106
32,000 Shimizu Corp...................................... 325
10,000 Shin-Etsu Chemical Co............................. 207
10,000 Shiseido Co., Ltd................................. 119
27,000 Shizuoka Bank..................................... 340
+44,000 Showa Denko....................................... 138
17,000 Sony Corp......................................... 1,019
111,000 Sumitomo Bank..................................... 2,354
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Active Country Allocation Portfolio
7
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
JAPAN (CONT.)
23,000 Sumitomo Cement................................... $ 107
89,000 Sumitomo Chemical Co.............................. 444
44,000 Sumitomo Corp..................................... 447
30,000 Sumitomo Electric................................. 360
9,000 Sumitomo Forestry Co., Ltd........................ 138
155,000 Sumitomo Metal Ind................................ 470
21,000 Sumitomo Metal & Mining........................... 189
44,000 Taisei Corp., Ltd................................. 294
44,000 Takeda Chemical................................... 724
7,000 TDK Corp.......................................... 357
44,000 Teijin Ltd........................................ 225
44,000 Tobu Railway Co................................... 275
21,925 Tohoku Electric Power............................. 529
69,000 Tokai Bank........................................ 962
66,000 Tokio Marine & Fire Insurance Co.................. 863
10,000 Tokyo Dome Corp................................... 171
43,952 Tokyo Electric Power Co........................... 1,175
8,000 Tokyo Electron Ltd................................ 310
117,000 Tokyo Gas Co...................................... 412
44,000 Tokyu Corp........................................ 311
31,000 Toppan Printing Co., Ltd.......................... 408
66,000 Toray Industries, Inc............................. 435
73,000 Toshiba Corp...................................... 572
22,000 Toto Ltd.......................................... 307
44,000 Toyoba Co......................................... 158
103,000 Toyota Motor Corp................................. 2,185
+44,000 Ube Industries Ltd................................ 166
44,000 Yamaichi Securities Co............................ 342
44,000 Yasuda Trust & Banking Co......................... 260
----------
71,490
----------
MALAYSIA (1.6%)
5,000 AMMB Holdings Bhd................................. 57
41,000 Amsteel Corp. Bhd................................. 30
5,000 Aokam Perdana Bhd................................. 8
6,000 Commerce Asset Holding Bhd........................ 30
20,000 DCB Holdings Bhd.................................. 58
6,000 Edaran Otomobil Nasional Bhd...................... 45
28,000 Golden Hope Plantations Bhd....................... 47
5,000 Golden Plus Holdings Bhd.......................... 9
10,000 Guinness Anchor Bhd............................... 19
19,000 Highlands & Lowlands Bhd.......................... 31
4,000 Hong Leong Industries Bhd......................... 21
24,000 Hong Leong Properties Bhd......................... 25
7,000 Hume Industries (Malaysia) Bhd.................... 34
+21,000 Idris Hydraulic (Malaysia) Bhd.................... 25
22,000 IGB Corp. Bhd..................................... 20
28,000 IOI Corp. Bhd..................................... 27
15,000 Kedah Cement Bhd.................................. 26
5,000 Kian Joo Can Factory Bhd.......................... 21
12,000 Land & General Bhd................................ 26
12,000 Leader Universal Holdings Bhd..................... 27
28,000 Magnum Corp. Bhd.................................. 53
28,000 Malayan Banking Bhd............................... 236
40,000 Malayan United Industries Bhd..................... 32
18,000 Malaysian Airline System Bhd...................... 58
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
25,000 Malaysian International Shipping Bhd (Foreign).... $ 65
15,000 Malaysian Mining Corp. Bhd........................ 22
3,000 Malaysian Oxygen Bhd.............................. 11
19,000 Malaysian Resources Corp. Bhd..................... 31
26,000 Metroplex Bhd..................................... 21
19,900 Mulpha International Bhd.......................... 20
20,000 Multi-Purpose Holdings Bhd........................ 29
4,000 Nestle (Malaysia) Bhd............................. 29
5,000 Oriental Holdings Bhd............................. 25
8,000 Perlis Plantations Bhd............................ 25
9,000 Petaling Garden Bhd............................... 10
15,000 Proton............................................ 53
25,000 Public Bank Bhd................................... 48
10,000 Rashid Hussain Bhd................................ 30
28,000 Resorts World Bhd................................. 150
9,000 R.J. Reynolds Bhd................................. 21
8,000 Rothmans of Pall Mall (Malaysia) Bhd.............. 66
11,000 Selangor Properties Bhd........................... 11
8,000 Shell Refining Co. (Malaysia) Bhd................. 23
53,000 Sime Darby Bhd.................................... 141
19,000 TA Enterprise Bhd................................. 23
22,000 Tan Chong Motor Holdings Bhd...................... 22
+18,000 Technology Resources Industries Bhd............... 53
51,000 Telekom Malaysia Bhd.............................. 398
79,700 Tenaga Nasional Bhd............................... 314
9,000 UMW Holdings Bhd.................................. 24
16,000 United Engineers Ltd. (Malaysia).................. 102
11,000 YTL Corp., Bhd.................................... 69
----------
2,801
----------
NETHERLANDS (3.1%)
7,469 ABN Amro Holdings N.V............................. 340
1,850 Akzo Nobel N.V.................................... 214
15,600 Elsevier N.V...................................... 208
950 Heineken N.V...................................... 169
6,638 Internationale Nederlanden Groep N.V.............. 444
2,082 KLM Royal Dutch Airlines N.V...................... 73
750 Koninklijke Hoogovens N.V......................... 25
3,074 Koninklijke Ahold N.V............................. 126
2,500 Koninklijke KNP BT N.V............................ 64
21,194 Koninklijke PTT Nederland N.V..................... 770
550 Nedlloyd Groep N.V................................ 12
7,900 Philips Electronics N.V........................... 286
12,700 Royal Dutch Petroleum Co.......................... 1,774
700 Stork N.V......................................... 17
3,800 Unilever N.V...................................... 534
1,650 Wolters Kluwer N.V................................ 156
----------
5,212
----------
SINGAPORE (2.8%)
23,000 Amcol Holdings Ltd................................ 63
62,000 City Developments Ltd............................. 451
18,000 Cycle & Carriage Ltd.............................. 179
65,000 DBS Land Ltd...................................... 220
32,000 Development Bank of Singapore Ltd. (Foreign)...... 398
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Active Country Allocation Portfolio
8
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
SINGAPORE (CONT.)
16,000 First Capital Corp. Ltd........................... $ 44
19,000 Fraser & Neave Ltd................................ 242
25,000 Hai Sun Hup Group Ltd............................. 17
33,000 Hotel Properties Ltd.............................. 51
15,000 Inchcape Bhd...................................... 48
9,000 Jurong Shipyard Ltd............................... 69
40,000 Keppel Corp., Ltd................................. 356
22,000 Natsteel Ltd...................................... 45
63,000 Neptune Orient Lines Ltd.......................... 71
47,000 Oversea-Chinese Banking Corp. (Foreign)........... 588
12,000 Overseas Union Enterprise Ltd..................... 61
25,000 Parkway Holdings Ltd.............................. 68
4,000 Robinson & Co. Ltd................................ 17
13,000 Shangri-La Hotel Ltd.............................. 51
59,000 Singapore Airlines Ltd. (Foreign)................. 551
16,800 Singapore Press Holdings (Foreign)................ 297
47,000 Straits Steamship Land Ltd........................ 159
31,000 Straits Trading Co., Ltd.......................... 73
125,000 United Industrial Corp. Ltd....................... 123
49,000 United Overseas Bank Ltd. (Foreign)............... 471
----------
4,713
----------
SPAIN (2.5%)
610 Acerinox S.A...................................... 62
5,800 Argentaria S.A.................................... 239
10,233 Autopistas (ACESA)................................ 116
10,900 Banco Bilbao Vizcaya S.A.......................... 393
7,300 Banco Central Hispano Americano S.A............... 148
5,500 Banco de Santander S.A............................ 276
1,000 Corporacion Financiera Alba....................... 62
1,300 Corporacion Mapfre................................ 73
3,300 Dragados y Construccion S.A....................... 43
2,700 Ebro Agricolas S.A................................ 28
1,000 ENCE S.A.......................................... 16
12,200 Endesa S.A........................................ 691
+4,900 Ercros S.A........................................ 3
1,100 FASA Renault S.A.................................. 18
700 Fomento Construction y Contractas S.A............. 54
1,750 Gas Natural SDG S.A............................... 273
42,100 Iberdrola S.A..................................... 385
200 MetroVacesa....................................... 7
500 Portland Valderrivas S.A.......................... 32
14,100 Repsol S.A........................................ 462
1,800 Tabacalera S.A., Class A.......................... 68
44,200 Telefonica de Espana S.A.......................... 612
14,700 Union Electrica Fenosa S.A........................ 88
1,950 Uralita S.A....................................... 18
2,100 Vallehermoso S.A.................................. 39
1,200 Viscofan Envolturas Celulosicas S.A............... 14
390 Zardoya Otis S.A.................................. 43
----------
4,263
----------
SWITZERLAND (3.3%)
+75 Adia S.A.(Bearer)................................. 12
50 Alusuisse-Lonza Holdings Ltd. (Bearer)............ 40
100 Alusuisse-Lonza Holdings Ltd. (Registered)........ 79
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
165 BBC Brown Boveri AG (Bearer)...................... $ 192
90 Ciba-Geigy AG (Bearer)............................ 79
450 Ciba-Geigy AG (Registered)........................ 396
2,275 CS Holding AG (Registered)........................ 233
10 Georg Fischer AG (Bearer)......................... 13
135 Holderbank AG (Bearer)............................ 104
100 Merkur Holding AG (Registered).................... 22
710 Nestle S.A. (Registered).......................... 785
30 Roche Holding AG (Bearer)......................... 420
130 Roche Holding AG (Registered)..................... 1,028
630 Sandoz AG (Registered)............................ 577
35 SGS Surveillance (Bearer)......................... 69
70 SMH AG (Bearer)................................... 42
300 SMH AG (Registered)............................... 39
70 Sulzer AG (Registered)............................ 40
+50 SwissAir (Registered)............................. 36
450 Swiss Bank Corp. (Bearer)......................... 184
700 Swiss Bank Corp. (Registered)..................... 143
300 Swiss Reinsurance (Registered).................... 349
390 Union Bank of Switzerland (Bearer)................ 423
430 Union Bank of Switzerland (Registered)............ 98
500 Zuerich Versicherung (Registered)................. 149
----------
5,552
----------
THAILAND (2.6%)
21,500 Advanced Information Services Co., Ltd.
(Foreign)....................................... 381
+32,400 Bangchak Petroleum Co., Ltd. (Foreign)............ 68
+107,300 Bangkok Metropolitan Bank Ltd..................... 102
11,900 Bank of Ayudhya Ltd. (Foreign).................... 67
11,800 CMIC Finance & Securities Co., Ltd................ 39
3,600 CP Feedmill Co., Ltd. (Foreign)................... 18
23,200 Dhana Siam Finance & Securities Co., Ltd.......... 133
27,400 General Finance & Securities Co., Ltd.
(Foreign)....................................... 126
22,900 Italian Thai Development Co., Ltd. (Foreign)...... 260
20,700 Jasmine International Co., Ltd. (Foreign)......... 127
127,500 Krung Thai Bank Ltd. (Foreign).................... 526
19,600 National Finance & Securities Co. Ltd.
(Foreign)....................................... 105
19,200 National Petrochemical............................ 49
+9,900 One Holding Co., Ltd. (Foreign)................... 25
16,900 Phatra Thanakit Co., Ltd. (Foreign)............... 145
+28,400 PTT Exploration & Production Co., Ltd (Foreign)... 298
+23,000 Quality House Public.............................. 100
+46,900 Sahaviriya Steel Industry (Foreign)............... 62
12,700 Shinawatra Computer Co., Ltd (Foreign)............ 313
+21,700 Shinawatra Satellite Co., Ltd. (Foreign).......... 35
3,600 Siam Cement Co., Ltd. (Foreign)................... 200
74,600 Siam City Bank Ltd. (Foreign)..................... 86
3,500 Siam City Cement Co., Ltd. (Foreign).............. 55
+204,100 TelecomAsia Corp., Ltd. (Foreign)................. 624
41,600 Thai Airways International Co., Ltd. (Foreign).... 78
26,500 Thai Military Bank Ltd. (Foreign)................. 107
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Active Country Allocation Portfolio
9
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
THAILAND (CONT.)
21,500 United Communications Industry (Foreign).......... $ 275
----------
4,404
----------
UNITED KINGDOM (7.9%)
30,600 Abbey National plc................................ 302
22,900 Argyll Group plc.................................. 121
22,200 Arjo Wiggins Appleton plc......................... 57
15,600 Associated British Foods plc...................... 89
26,300 Barclays plc...................................... 302
16,600 Bass plc.......................................... 185
55,823 BAT Industries plc................................ 492
10,500 BICC plc.......................................... 45
19,400 Blue Circle Industries plc........................ 103
9,500 BOC Group plc..................................... 133
19,400 Boots Co. plc..................................... 176
13,100 BPB Industries plc................................ 61
7,800 British Aerospace plc............................. 97
18,100 British Airways plc............................... 131
81,900 British Gas plc................................... 323
93,400 British Petroleum Co. plc......................... 782
32,100 British Sky Broadcasting plc...................... 203
33,900 British Steel plc................................. 86
84,900 British Telecommunications plc.................... 467
65,700 BTR plc........................................... 336
4,484 Burmah Castrol plc................................ 65
39,403 Cable & Wireless plc.............................. 281
18,700 Cadbury Schweppes plc............................. 154
12,200 Caradon plc....................................... 37
13,300 Coats Viyella plc................................. 36
8,000 Commercial Union plc.............................. 78
7,800 Courtaulds plc.................................... 49
5,578 De La Rue Co. plc................................. 56
26,200 Forte plc......................................... 134
7,800 General Accident plc.............................. 79
59,400 General Electric plc.............................. 327
8,300 GKN plc........................................... 100
54,500 Glaxo Wellcome plc................................ 774
43,772 Grand Metropolitan plc............................ 315
18,900 Great Universal Stores plc........................ 201
25,869 Guardian Royal Exchange plc....................... 111
32,200 Guinness plc...................................... 237
93,700 Hanson plc........................................ 280
18,900 Harrisons & Crosfields plc........................ 47
36,600 HSBC Holdings plc................................. 558
13,300 Imperial Chemical Industries plc.................. 157
26,100 Ladbroke Group plc................................ 59
11,600 Land Securities plc............................... 111
16,600 Lasmo plc......................................... 45
58,947 Lloyds TSB Group plc.............................. 303
13,862 Lonrho plc........................................ 38
53,800 Marks and Spencer plc............................. 376
8,900 MEPC plc.......................................... 55
22,100 National Power plc................................ 154
10,000 North West Water Group plc........................ 96
16,100 Peninsular & Oriental Steam Navigation Co......... 119
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
22,200 Pilkington plc.................................... $ 70
39,100 Prudential Corp. plc.............................. 252
8,300 Rank Organization plc............................. 60
12,200 Redland plc....................................... 74
10,500 Reed International plc............................ 160
29,200 Reuters Holdings plc.............................. 267
8,900 Rexam plc......................................... 49
7,100 RMC Group plc..................................... 109
14,400 Royal Bank of Scotland Group plc.................. 131
13,100 Royal Insurance Holdings plc...................... 78
22,700 RTZ Corp. plc..................................... 330
22,560 Sainsbury (J) plc................................. 138
4,500 Schroders plc..................................... 96
14,000 Scottish Power plc................................ 80
28,800 Sears plc......................................... 47
9,000 Sedgwick Group plc................................ 17
6,700 Slough Estates plc................................ 23
22,600 SmithKline Beecham plc, Class A................... 249
5,600 Southern Electric plc............................. 79
20,600 Tarmac plc........................................ 33
11,100 Taylor Woodrow plc................................ 20
29,300 Tesco plc......................................... 135
10,500 Thames Water plc.................................. 92
9,400 THORN EMI plc..................................... 221
7,800 TI Group plc...................................... 56
+20,000 Trafalgar House plc............................... 9
11,900 Unilever plc...................................... 244
55,700 Vodafone Group plc................................ 199
13,500 Zeneca Group plc.................................. 261
----------
13,502
----------
TOTAL COMMON STOCKS (Cost $142,163)........................... 152,786
----------
PREFERRED STOCKS (2.0%)
AUSTRALIA (0.1%)
24,000 News Corp., Ltd................................... 112
----------
BRAZIL (NON-VOTING STOCKS) (1.7%)
31,666 Aracruz Celelose S.A., Class B.................... 49
19,080,443 Banco Bradesco.................................... 167
+4,252,000 Banco do Brasil................................... 48
+1,871,000 Banco do Estado Sao Paulo......................... 10
249,663 Brahma............................................ 103
1,191,000 Ceval Alimentos S.A............................... 14
1,786,000 Cia Brasileira de Petroleo Ipiranga............... 15
4,035,500 Cia Energetica de Minas Gerais.................... 89
+102,000 Cia Energetica de Sao Paulo....................... 3
3,570,000 Cia Siderurgica de Tubarao........................ 58
2,636,000 Eletrobras, Class B............................... 713
32,500 Industrias Klabin de Papel e Celulose S.A......... 29
111,000 Investimentos Itau S.A............................ 61
357,000 Itaubanco......................................... 100
3,742,000 Petrobras......................................... 320
27,000 Sadia Concordia................................... 20
12,416,000 Telebras.......................................... 598
638,000 Telecomunicacoes de Sao Paulo..................... 94
56,980,000 Usiminas.......................................... 46
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Active Country Allocation Portfolio
10
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
BRAZIL (CONT.)
1,956,000 Vale Do Rio Doce.................................. $ 322
----------
2,859
----------
GERMANY (0.2%)
500 RWE AG............................................ 139
1,050 SAP AG............................................ 159
----------
298
----------
ITALY (0.0%)
27,000 Fiat S.p.A........................................ 49
----------
TOTAL PREFERRED STOCKS (Cost $3,082).......................... 3,318
----------
NO. OF
RIGHTS
- ----------
RIGHTS (0.0%)
BRAZIL (0.0%)
+**446,139 Banco Bradesco, expiring 2/96..................... 1
----------
SPAIN (0.0%)
+**4,900 Ercros, expiring 1/5/96........................... --
----------
UNITED KINGDOM (0.0%)
+7,425 Pilkington plc, expiring 1/8/96................... 23
----------
TOTAL RIGHTS (Cost $18)....................................... 24
----------
NO. OF
WARRANTS
- ----------
WARRANTS (0.0%)
BELGIUM (0.0%)
+347 Petrofina S.A., expiring 6/03/97.................. 5
----------
HONG KONG (0.0%)
+**4,400 Applied International Holdings, expiring
12/30/99........................................ --
----------
ITALY (0.0%)
+2,950 R.A.S. S.p.A, expiring 12/31/97................... 12
+1,550 R.A.S. S.p.A., Saving Shares, expiring 12/31/97... 3
----------
15
----------
MALAYSIA (0.0%)
**+2,400 Hong Leong Properties, expiring 10/00............. --
+***7,000 IOI Corp.......................................... 1
----------
THAILAND (0.0%)
+**3,050 CMIC Finance & Securities Co., Ltd., expiring
1999............................................ 1
+**6,400 National Finance & Securities Co. Ltd. expiring
11/15/99........................................ --
----------
1
----------
UNITED KINGDOM (0.0%)
+534 British Aerospace, expiring 11/15/00.............. 3
----------
TOTAL WARRANTS (Cost $1)...................................... 25
----------
NO. OF VALUE
UNITS (000)
- ------------------------------------------------------------
UNITS (0.2%)
AUSTRALIA (0.0%)
20,821 General Property Trust............................ $ 37
22,888 Westfield Trust................................... 41
1,762 Westfield Trust (New)............................. 3
----------
81
----------
UNITED KINGDOM (0.2%)
21,700 SmithKline Beecham plc............................ 237
----------
TOTAL UNITS (Cost $270)....................................... 318
----------
FACE
AMOUNT
(000)
- ----------
CONVERTIBLE DEBENTURES (0.0%)
FRANCE (0.0%)
FRF 60 Sanofi 4.00%, 1/1/00.............................. 45
----------
ITALY (0.0%)
ITL 3,150 Saffa S.p.A. 9.25%, 1/1/01........................ 2
----------
TOTAL CONVERTIBLE DEBENTURES (Cost $40)....................... 47
----------
TOTAL FOREIGN SECURITIES (91.7%)
(Cost $145,574)............................................... 156,518
----------
SHORT-TERM INVESTMENT (2.2%)
UNITED STATES (2.2%)
REPURCHASE AGREEMENT (2.2%)
$ 3,746 The Chase Manhattan Bank, N.A., 5.35%, dated
12/29/95, due 1/02/96, to be repurchased at
$3,748, collateralized by $3,045 United States
Treasury Bonds, 7.875%, due 2/15/21, valued at
$3,821 (Cost $3,746)............................ 3,746
----------
FOREIGN CURRENCY (0.2%)
AUD 14 Australian Dollar................................. 10
BEF 623 Belgian Franc..................................... 21
GBP 17 British Pound..................................... 26
DEM 17 Deutsche Mark..................................... 12
FRF 61 French Franc...................................... 12
HKD 383 Hong Kong Dollar.................................. 50
IDR 2,251 Indonesian Rupiah................................. 1
JPY 4,508 Japanese Yen...................................... 44
MYR 16 Malaysian Ringgit................................. 6
NLG 68 Netherlands Guilder............................... 43
PTE 20,102 Portuguese Escudo................................. 134
SGD 31 Singapore Dollar.................................. 22
ESP 195 Spanish Peseta.................................... 2
CHF 3 Swiss Franc....................................... 3
THB 162 Thai Baht......................................... 6
----------
TOTAL FOREIGN CURRENCY (Cost $391)............................ 392
----------
TOTAL INVESTMENTS (94.1%) (Cost $149,711)..................... 160,656
----------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Active Country Allocation Portfolio
11
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
AMOUNT
(000)
- ----------------------------------------------------
OTHER ASSETS (6.0%)
Net Unrealized Gain on
Forward Foreign Currency
Exchange Contracts......... $ 9,417
Receivable for Portfolio
Shares Sold................ 524
Foreign Withholding Tax
Reclaim Receivable......... 167
Dividends Receivable........ 164
Interest Receivable......... 2
Other....................... 14 $ 10,288
----------
LIABILITIES (-0.1%)
Investment Advisory Fees
Payable.................... (77)
Custodian Fees Payable...... (71)
Payable for Portfolio Shares
Redeemed................... (43)
Administrative Fees
Payable.................... (26)
Payable for Investments
Purchased.................. (23)
Other Liabilties............ (41) (281)
---------- --------
NET ASSETS (100%)......................... $170,663
--------
--------
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 14,672,976 outstanding
$.001 par value shares (authorized
500,000,000 shares)..................... $11.63
--------
--------
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT
INFORMATION:
Under the terms of forward foreign currency
exchange contracts open at December 31, 1995, the
Portfolio is obligated to deliver or is to receive
foreign currency in exchange for U.S. dollars as
indicated below:
<TABLE>
<CAPTION>
NET
UNREALIZED
CURRENCY TO IN EXCHANGE GAIN
DELIVER VALUE SETTLEMENT FOR VALUE (LOSS)
(000) (000) DATE (000) (000) (000)
- ------------- -------- ---------- ------------- -------- --------
<S> <C> <C> <C> <C> <C>
DEM 5,930 $ 4,136 1/04/96 U.S.$ 4,155 $ 4,155 $ 19
FRF 28,174 5,753 1/04/96 U.S.$ 5,670 5,670 (83)
CHF 6,170 5,382 2/28/96 U.S.$ 5,100 5,100 (282)
BEF 225,256 7,669 4/30/96 U.S.$ 8,000 8,000 331
DEM 6,458 4,525 4/30/96 U.S.$ 4,500 4,500 (25)
JPY4,591,639 45,210 4/30/96 U.S.$ 54,440 54,440 9,230
U.S.$ 4,790 4,790 4/30/96 BEF 141,479 4,817 27
U.S.$ 7,378 7,378 4/30/96 JPY 606,988 5,977 (1,401)
NLG 12,205 7,686 7/31/96 U.S.$ 8,000 8,000 314
U.S.$ 2,850 2,850 7/31/96 NLG 4,661 2,935 85
JPY 886,827 8,849 8/14/96 U.S.$ 9,630 9,630 781
JPY 310,447 3,104 8/30/96 U.S.$ 3,525 3,525 421
-------- -------- --------
$107,332 $116,749 $ 9,417
-------- -------- --------
-------- -------- --------
</TABLE>
- ------------------------------------------------------------
+ -- Non-income producing security
** -- Security is valued at fair
value -- See Note A-1
*** -- Security is valued at cost --
See Note A-1
NCS -- Non Convertible Shares
RFD -- Ranked for Dividends
ITL -- Italian Lira
- ------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- --------------------------------------------------------
Capital Equipment............. $ 21,419 12.6%
Consumer Goods................ 27,288 16.0
Energy........................ 16,779 9.8
Finance....................... 43,246 25.3
Gold Mines.................... 72 --
Materials..................... 18,501 10.8
Multi-Industry................ 7,106 4.2
Services...................... 22,107 13.0
---------- ---
$ 156,518 91.7%
---------- ---
---------- ---
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Active Country Allocation Portfolio
12
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE ASIAN EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (91.0%)
CHINA (1.2%)
979,440 China Merchants Shekou Port Services, Class B..... $ 355
+28,200 Jilin Chemical Co. Ltd. ADR....................... 606
5,505,000 Maanshan Iron & Steel Co., Class H................ 769
51,000 Shandong Huaneng Power Co., Ltd. ADR.............. 344
1,601,600 Shanghai Jinqiao, Class B......................... 599
+555,400 Shanghai Refrigerator Compressor, Class B......... 198
276,000 Shanghai Tyre & Rubber Co., Class B............... 57
4,265,000 Yizheng Chemical Fibre Co., Class H............... 960
----------
3,888
----------
HONG KONG (26.7%)
2,316,000 Cheung Kong Holdings Ltd.......................... 14,107
358,000 China Light & Power Co., Ltd...................... 1,648
1,209,500 Citic Pacific Ltd................................. 4,137
6,294,000 C.P. Pokphand Co., Ltd............................ 2,523
11,712,000 Guangdong Investments Ltd......................... 7,043
1,056,000 Harbin Power Equipment Co......................... 155
765,500 Hong Kong Electric Holdings Ltd................... 2,510
673,320 Hong Kong & Shanghai Bank Holdings plc............ 10,188
5,088,600 Hong Kong Telecommunications Ltd.................. 9,081
3,812,000 Hopewell Holdings Ltd............................. 2,194
1,827,000 Hutchison Whampoa Ltd............................. 11,129
+1,605,000 New World Development Co., Ltd.................... 6,995
3,008 New World Infrastructure Ltd...................... 6
+1,835,100 Shenzen North Jainshe Motorcycle Co., Ltd., Class
B............................................... 759
612,100 Sun Hung Kai Properties Ltd....................... 5,007
621,560 Swire Pacific Ltd., Class A....................... 4,823
906,000 Varitronix International Ltd...................... 1,681
----------
83,986
----------
INDIA (0.8%)
38,000 Grasim Industries Ltd. GDR........................ 779
#51,000 Hindalco Industries Ltd. GDR...................... 1,734
----------
2,513
----------
INDONESIA (5.3%)
**583,000 Asiana Imi Industries (Foreign)................... 306
**294,000 Bank Bali (Foreign)............................... 579
**859,000 Barito Pacific Timber (Foreign)................... 629
+**691,000 Bimantara Citra (Foreign)......................... 574
**621,826 Charoen Pokphand (Foreign)........................ 1,265
**141,100 Hanajaya Mandala Sampoerna (Foreign).............. 1,469
**302,000 Indocement Tunggal (Foreign)...................... 1,013
**730,000 Indosat (Foreign)................................. 2,650
**351,600 Kalbe Farma (Foreign)............................. 1,192
**210,000 Keramika Indonesia Assosiasi (Foreign)............ 101
**1,400,000 Ometraco (Foreign)................................ 689
+**177,000 Polysindo Eka Perkasa (Foreign)................... 101
**315,000 Semen Gresik (Foreign)............................ 882
**2,750,400 Sona Topas Tourism (Foreign)...................... 782
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
**277,333 Sorini Corp. (Foreign)............................ $ 1,345
**210,500 Suba Indah (Foreign).............................. 140
+**1,170,500 Telekomunikasi Indonesia (Foreign)................ 1,536
**590,000 Ultra Jaya Milk (Foreign)......................... 284
**644,800 United Tractors (Foreign)......................... 1,213
----------
16,750
----------
KOREA (3.3%)
**53,900 Korea Electric Power (Foreign).................... 2,311
**1,500 Korea Mobile Telecom (Foreign).................... 1,657
61,600 Pohang Iron & Steel Co., Ltd. ADR................. 1,348
+21,953 Samsung Electronics (Foreign)..................... 3,990
+185 Samsung Electronics (Foreign) (New)............... 34
+44 Samsung Electronics GDR........................... 3
+#152 Samsung Electronics GDS........................... 15
+#771 Samsung Electronics GDS (Voting Shares)........... 74
+811 Samsung Electronics RFD (New)..................... 145
**44,460 Shinhan Bank (Foreign)............................ 976
----------
10,553
----------
MALAYSIA (19.3%)
149,000 AMMB Holdings Bhd................................. 1,701
604,000 Bandar Raya Developments Bhd...................... 861
954,500 Genting Bhd....................................... 7,968
861,000 Land & General Holdings Bhd....................... 1,865
714,000 Magnum Corp. Bhd.................................. 1,349
1,191,500 Malayan Banking Bhd............................... 10,040
1,125,316 Malaysian International Shipping Bhd (Foreign).... 2,947
1,000 Malaysian Resources Corp. Bhd..................... 2
518,000 Petronas Gas Bhd.................................. 1,764
2,528,000 Renong Bhd........................................ 3,743
1,388,000 Resorts World Bhd................................. 7,433
650,000 Sime Darby Bhd.................................... 1,727
1,243,000 Tan & Tan Development Bhd......................... 1,062
+569,000 Technology Resources Industries Bhd............... 1,680
785,000 Telekom Malaysia Bhd.............................. 6,120
1,314,000 Tenaga Nasional Bhd............................... 5,173
264,000 Time Engineering Bhd.............................. 613
718,757 United Engineers Ltd. (Malaysia).................. 4,585
----------
60,633
----------
PHILIPPINES (5.6%)
1,379,300 Ayala Corp., Class B.............................. 1,683
1,175,625 Ayala Land, Inc., Class B......................... 1,434
+2,062,100 C&P Homes, Inc.................................... 1,513
+1,791,000 DMCI Holdings, Inc................................ 642
+597,700 Fil-Estate Land Inc............................... 450
6,958,000 JG Summit Holding, Class B........................ 1,910
362,050 Manila Electric Co., Class B...................... 2,954
5,149,900 Petron Corp....................................... 2,651
18,125 Phillipine Long Distance Telephone Co., ADR....... 981
15,430 Philippine Long Distance Telephone Co., Class B... 838
+29,440 Philippine National Bank, Class B................. 326
317,200 San Miguel Corp., Class B......................... 1,082
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Asian Equity Portfolio
15
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE ASIAN EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
PHILIPPINES (CONT.)
+4,508,000 SM Prime Holdings, Inc., Class B.................. $ 1,289
----------
17,753
----------
SINGAPORE (13.1%)
206,000 British-American Tobacco Co....................... 794
628,080 City Developments Ltd............................. 4,574
912,000 DBS Land Ltd...................................... 3,082
362,500 Development Bank of Singapore Ltd. (Foreign)...... 4,510
148,800 Fraser & Neave Ltd................................ 1,894
690,000 Keppel Corp., Ltd................................. 6,146
538,166 Oversea-Chinese Banking Corp. (Foreign)........... 6,734
263,000 Sembawang Corp.................................... 1,460
111,000 Singapore Airlines Ltd. (Foreign)................. 1,035
89,400 Singapore Press Holdings (Foreign)................ 1,580
1,472,000 Singapore Technologies Industrial Corp............ 3,330
507,000 Straits Steamship Land Ltd........................ 1,713
500,000 Straits Trading Co., Ltd.......................... 1,174
332,200 United Overseas Bank Ltd. (Foreign)............... 3,194
----------
41,220
----------
TAIWAN (2.5%)
806,000 Acer, Inc......................................... 1,861
412,000 Advanced Semiconductor Engineering, Inc........... 997
904,000 Taiwan Semiconductor Manufacturing Co............. 2,832
905,000 United Micro Electronics Corp., Ltd............... 2,272
----------
7,962
----------
THAILAND (13.2%)
84,000 Advanced Information Services Co., Ltd.
(Foreign)....................................... 1,487
583,200 Bangkok Bank Ltd. (Foreign)....................... 7,085
679,900 Finance One Co., Ltd. (Foreign)................... 4,723
36,000 Land & House Co., Ltd. (Foreign).................. 592
+202,800 National Finance & Securities Co., Ltd.
(Foreign)....................................... 1,087
266,600 Phatra Thanakit Co., Ltd. (Foreign)............... 2,286
84,100 Shinawatra Computer Co., Ltd (Foreign)............ 2,070
38,900 Siam Cement Co., Ltd. (Foreign)................... 2,157
344,100 Siam Commercial Bank (Foreign).................... 4,535
+1,450,500 TelecomAsia Corp. (Foreign)....................... 4,434
702,170 Thai Farmers Bank Ltd. (Foreign).................. 7,080
+320,000 Thai Telephone & Telecom (Foreign)................ 2,298
101,000 United Communications Industry (Foreign).......... 1,291
375,000 Wongpaitoon Footware Co., Ltd. (Foreign).......... 406
----------
41,531
----------
TOTAL COMMON STOCKS (Cost $243,859)............................. 286,789
----------
<CAPTION>
NO. OF VALUE
WARRANTS (000)
</TABLE>
- ------------------------------------------------------------
<TABLE>
<C> <S> <C>
WARRANTS (0.0%)
INDONESIA (0.0%)
**+150,000 Ometraco, expiring 7/12/00 (Cost $0).............. $ --
----------
TOTAL FOREIGN SECURITIES (91.0%) (Cost $243,859)................ 286,789
----------
<CAPTION>
FACE AMOUNT
(000)
- ------------
SHORT-TERM INVESTMENT (8.3%)
UNITED STATES
REPURCHASE AGREEMENT (8.3%)
$ 26,154 The Chase Manhattan Bank, N.A. 5.35%, dated
12/29/95 due 1/02/96, to be repurchased at
$26,170, collateralized by $16,885 United States
Treasury Bonds, 12.00%, due 8/15/13, valued at
$26,678 (Cost $26,154).......................... 26,154
----------
FOREIGN CURRENCY (0.3%)
HKD 2,770 Hong Kong Dollar.................................. 358
IDR 810,970 Indonesian Rupiah................................. 355
MYR 1 Malaysian Ringgit................................. --
TWD 3,102 Taiwan Dollar..................................... 114
----------
TOTAL FOREIGN CURRENCY (Cost $827).............................. 827
----------
TOTAL INVESTMENTS (99.6%) (Cost $270,840)....................... 313,770
----------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (1.2%)
Receivable for Investments Sold................. $ 2,182
Receivable for Portfolio Shares Sold............ 1,007
Dividends Receivable............................ 472
Foreign Withholding Tax Reclaim Receivable...... 23
Interest Receivable............................. 12
Other........................................... 23 3,719
----------
LIABILITIES (-0.8%)
Payable for Portfolio Shares Redeemed........... (1,025)
Bank Overdraft.................................. (541)
Payable for Investments Purchased............... (427)
Investment Advisory Fees Payable................ (411)
Custodian Fees Payable.......................... (112)
Administrative Fees Payable..................... (41)
Other Liabilities............................... (48) (2,605)
---------- ----------
NET ASSETS (100%)............................................. $ 314,884
----------
----------
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 16,166,258 outstanding $.001 par value shares
(authorized 500,000,000 shares)............................. $19.48
----------
----------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Asian Equity Portfolio
16
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE ASIAN EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<S> <C> <C>
+ -- Non-income producing security
** -- Securities (totaling $21,694 or 6.9% of net assets
at December 31, 1995) valued at fair value -- See
Note A-1
# -- 144A Security -- Certain conditions for public sale
may exist.
ADR -- American Depositary Receipt
GDR -- Global Depositary Receipt
GDS -- Global Depositary Shares
RFD -- Ranked for Dividends
</TABLE>
- ------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- ---------------------------------------------------------------
Capital Equipment.................... $ 27,807 8.8%
Consumer Goods....................... 18,705 5.9
Energy............................... 19,356 6.2
Finance.............................. 118,063 37.5
Materials............................ 12,063 3.8
Multi-Industry....................... 25,827 8.2
Services............................. 64,968 20.6
--------- -----
$ 286,789 91.0%
--------- -----
--------- -----
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Asian Equity Portfolio
17
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE EMERGING MARKETS PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (84.1%)
ARGENTINA (1.0%)
+6 Acindar Industrial S.A., Class B................ $ --
#120,670 Capex S.A. ADR.................................. 1,765
67,858 Capex S.A., Class A............................. 495
431,533 Quilmes Industrial S.A.......................... 6,732
--------
8,992
--------
BRAZIL (5.6%)
302,170,000 Cia Acos Especiais Itabira...................... 1,430
+124,935 Cia Brasileira ADR.............................. 1,249
#696 Cia Energetica de Minas Gerais ADR.............. 15
84,361 Cia Energetica de Minas Gerais GDR.............. 1,867
#+116,352,140 Cia Energetica de Sao Paulo..................... 2,634
49,544,000 Cia Paulista de Forca E Luz..................... 2,401
17,175,000 Eletrobras...................................... 4,648
#180,024 Rhodia-Ster ADS................................. 1,620
7,175,000 Servicos de Eletricidade........................ 2,296
139,692,000 Telebras........................................ 5,404
#512,169 Telebras ADR.................................... 24,264
5,175,000 Telecomunicacoes de Sao Paulo................... 748
#50 Usiminas ADR.................................... 1
--------
48,577
--------
CHINA (1.6%)
750,000 Beiren Printing Machine, Class H................ 136
3,340,040 China Merchants Shekou Port Services, Class B... 1,209
3,720,000 Harbin Power Equipment Co. Ltd., Class H........ 548
+91,500 Jilin Chemical Co. Ltd. ADR..................... 1,967
2,658,500 Shanghai Diesel Engine Co., Ltd., Class B....... 984
+883,300 Shanghai Erfanji Co., Ltd., Class B............. 125
949,975 Shanghai Jin Jiang Tower Ltd., Class B.......... 268
3,673,680 Shanghai Jinqiao, Class B....................... 1,374
1,062,750 Shanghai Outer Gaoqiao Free Zone, Class B....... 389
903,800 Shanghai Phoenix Bicycle Ltd., Class B.......... 150
+1,114,130 Shanghai Refrigerator Compressor, Class B....... 397
986,000 Shanghai Tyre & Rubber Co., Class B............. 203
354,000 Shanghai Yaohua Pilkington Glass, Class B....... 312
3,126,400 Shenzhen Chiwan Wharf Holdings, Class B......... 1,177
+4,171,000 Shenzhen North Jianshe Motorcycle Co., Ltd.,
Class B....................................... 1,726
13,658,000 Yizheng Chemical Fibre Co., Class H............. 3,073
68,000 Zhuhai Lizhu Pharmaceutical Group, Inc., Class
B............................................. 22
--------
14,060
--------
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
COLOMBIA (0.7%)
17,130,000 Banco de Colombia............................... $ 6,207
--------
GREECE (2.8%)
413,369 Aegek........................................... 3,558
76,550 Alpha Credit Bank of Athens..................... 4,425
278,475 Delta Dairy..................................... 5,229
165,870 Ergo Bank....................................... 6,611
142,000 Hellenic Bottling Co............................ 4,644
--------
24,467
--------
HONG KONG (9.9%)
1,597,000 Cheung Kong Holdings Ltd........................ 9,728
2,628,000 Citic Pacific Ltd............................... 8,989
14,327,000 C.P. Pokphand Co., Ltd.......................... 5,744
4,500,00 Florens Group Ltd............................... 2,939
65,800 Great Wall Electric Ltd. ADR.................... 242
11,431,000 Guangdong Investments Ltd....................... 6,874
2,686,200 Hong Kong Telecommunications Ltd................ 4,794
5,397,000 Hopewell Holdings Ltd........................... 3,106
2,049,000 Hutchison Whampoa Ltd........................... 12,481
3,478,000 New World Development Co., Ltd.................. 15,158
+162,400 Shandong Huaneng Power Co., Ltd., ADR........... 1,096
617,000 Sun Hung Kai Properties Ltd..................... 5,047
618,000 Swire Pacific Ltd., Class A..................... 4,795
2,819,000 Varitronix International Ltd.................... 5,232
1,554,000 Wai Kee Holdings Ltd............................ 195
2,646,000 Zhenhai Refining & Chemical Co., Ltd., Class
H............................................. 496
--------
86,916
--------
INDIA (8.7%)
230,000 American Dry Fruits............................. 235
550 Andhra Valley Power Supply, Class B............. 2
100,000 AP Rayon, Class B............................... 215
10,000 Apollo Tyres Ltd................................ 39
77,650 Aruna Sugars & Enterprises, Class B............. 59
9,815 Associated Cement Companies Ltd................. 800
86,400 BPL Ltd......................................... 182
+891,500 Balaji Foods & Feeds............................ 298
8,500 Ballapur Industries Ltd., Class B............... 45
9,065 Baroda Rayon Corp............................... 80
92,284 Bharat Forge Co., Ltd., Class A................. 358
3,300,000 Bharat Heavy Electricals........................ 8,258
374,600 Bharat Pipes & Fittings Ltd., Class B........... 128
+125,000 Bharat Pipes & Fittings Ltd. (New).............. 34
191,642 Carrier Aircon Ltd., Class B.................... 937
90,000 Cosmo Films Ltd................................. 266
305,000 Crompton Greaves................................ 1,735
25,900 DCL Polyesters Ltd.............................. 15
77,000 DCM Shriram Industries Ltd...................... 149
38,800 Delta Industries Ltd............................ 80
185,000 Essab India Ltd................................. 300
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Emerging Markets Portfolio
20
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE EMERGING MARKETS PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
INDIA (CONT.)
50,000 Essel Packaging................................. $ 264
12,000 Federal Bank Ltd................................ 60
2,370 Flex Industries Ltd., Class B................... 11
+16,566 Flex Industries Ltd. (New)...................... 67
10,000 Fuller.......................................... 48
+557,338 Garware Plastics & Polyester, Class A........... 2,995
+712,500 Godrej Soaps Ltd................................ 1,378
1,013,500 Great Eastern Shipping Co....................... 1,391
203,100 Gujarat Ambuja Cements, Ltd..................... 1,568
101,950 Hero Honda, Class B............................. 664
104,277 Housing Development Finance Corp................ 8,021
*@+78,000 India Magnum Fund, (The) Class A (acquired
11/25/92-3/01/94, Cost $3,782)................ 3,510
@+55,194 India Magnum Fund, (The) Class B................ 2,484
644,625 India Organic Chemical Ltd...................... 633
+396,200 Indian Petrochemicals Corp. Ltd................. 1,392
+40,000 Indian Seamless Steel & Alloys.................. 9
+571,197 Indo Rama Synthetic, Class B.................... 570
100,000 Infosys Technology Ltd.......................... 1,160
155,100 ITC Agrotech, Class B........................... 280
+113,500 ITC Ltd......................................... 808
225 ITW Signode Ltd. (New).......................... 1
608,700 Jai Parabolic Springs Ltd....................... 476
5,292 JCT Ltd. GDR.................................... 35
+353,231 JK Synthetics Ltd............................... 246
78,500 Kiloskar Oil Engine, Class B.................... 279
550 Lakme Ltd., Class B............................. 4
150,000 Lakshmi Precision............................... 252
+145,000 Laser Lamp...................................... 73
748,800 Mahanagar Telephone Nigam....................... 3,130
96,484 Mahavir Spinning Mills Ltd...................... 307
+425,700 Maikaal Fibres.................................. 127
159,700 Mardia Chemicals Ltd............................ 238
10,000 Modi Xerox Ltd.................................. 50
@+8,275,200 Morgan Stanley Growth Fund...................... 1,412
@+19,389 Morgan Stanley India Investment Fund, Inc....... 177
73,631 MRF Ltd., Class B............................... 3,767
350 Mukand Iron & Steel Works, Class A.............. 2
6 Nahar Spinning Mills Ltd., Class B.............. --
25,000 OM Sindoori Hotels Ltd.......................... 36
250,000 Patheja Forgings & Auto Parts, Class B.......... 540
+318,935 PCS Data Products Ltd., Class B................. 127
240,700 Philips India Ltd............................... 1,054
+135,500 Polar Latex..................................... 42
+232,700 Priyadarshini Cement Ltd., Class B.............. 142
8,200 Pudumjee........................................ 34
350,000 PVD Plastic Mouldings Inds. Ltd., Class B....... 181
850 Ranbaxy Laboratories Ltd., Class B.............. 16
152,250 Raymond Ltd..................................... 1,161
+200 Raymond Synthetics Ltd., Class B................ --
+3,770 Reliance Industries Ltd. GDS.................... 54
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
#73,581 Reliance Industries Ltd. GDS (New).............. $ 1,030
+25,350 Rossel Tea Ltd.................................. 144
+100,000 Saurashtra Cement & Chemicals, Class B.......... 176
29,500 SCICI Ltd....................................... 31
+50,000 Secals Ltd...................................... 84
+104,700 Sharp Industries Ltd............................ 41
397,500 Shipping Corp. of India......................... 350
25,000 Shree Vindhya Paper Mills....................... 57
125,636 Shree Vindhya Paper Mills (New)................. 288
125 S.K.F. Bearings Ltd............................. 9
+45,000 Sri Venkatesa Mills Ltd......................... 141
1,648,550 State Bank of India............................. 9,296
+400 Sundaram Finance, Class B....................... 2
725,950 Super Forgings & Steels......................... 537
272,280 Tata Engineering & Locomotive, Class A.......... 2,937
28,350 Tata Hydro Electric Power....................... 73
+2,180 Tata Power Co. Ltd.............................. 7
+320,000 Titagarh Steels Ltd............................. 312
600 T.P.I. India Ltd................................ 1
838 United Phosphorus Ltd. GDR...................... 17
165,500 Uniworth International Ltd., Class B............ 89
+1,566,000 Uttam Steels Ltd., Class A...................... 802
404 Videocon International Ltd., Class A............ 1
+149,100 Videsh Sanchar Nigam Ltd........................ 3,519
710,040 VXL Ltd......................................... 655
11,000 Vysya Bank...................................... 138
+5,000 Wartsila Diesel Ltd............................. 28
--------
76,256
--------
INDONESIA (6.3%)
**2,553,550 Bank Bali (Foreign)............................. 5,026
**1,703,500 Barito Pacific Timber (Foreign)................. 1,248
**+2,244,000 Bimantara Citra (Foreign)....................... 1,865
**3,359,598 Charoen Pokphand (Foreign)...................... 6,832
**168,000 Duta Pertiwi (Foreign).......................... 171
**425,500 Hanajaya Mandala Sampoerna (Foreign)............ 4,429
**1,147,000 Indocement Tunggal (Foreign).................... 3,850
**1,274,500 Indosat (Foreign)............................... 4,626
**808,100 Jembo Cable Co. (Foreign)....................... 521
**1,358,200 Kalbe Farma (Foreign)........................... 4,604
**481,000 Keramika Indonesia Assosiasi (Foreign).......... 231
**2,096,500 Polysindo Eka Perkasa (Foreign)................. 1,192
**1,058,500 Semen Gresik (Foreign).......................... 2,963
**4,336,200 Sona Topas Tourism (Foreign).................... 1,233
**1,220,000 Sorini Corp. (Foreign).......................... 5,923
**150,000 Suba Indah (Foreign)............................ 100
**+1,607,000 Telekomunikasi Indonesia (Foreign).............. 2,108
**1,467,600 Tempo Scan Pacific (Foreign).................... 3,979
**2,145,500 United Tractors (Foreign)....................... 4,035
--------
54,936
--------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Emerging Markets Portfolio
21
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE EMERGING MARKETS PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
ISRAEL (3.9%)
72,200 ELBIT........................................... $ 3,851
2,860 First International Bank of Israel, Class 1..... 335
25,122 First International Bank of Israel, Class 5..... 3,032
524,467 Israel Land Development......................... 1,517
80,819 Koor Industries................................. 8,023
543,520 Osem Investment................................. 3,250
+137,336 PEC Israel Economic Corp........................ 3,313
54,397 Scitex Ltd...................................... 741
164,365 Super Sol Ltd., Class B......................... 3,455
145,000 Teva Pharmaceutical Industries Ltd. ADR......... 6,724
--------
34,241
--------
KOREA (2.2%)
**7,890 Pohang Iron & Steel (Foreign)................... 557
71,480 Samsung Electronics (Foreign)................... 12,992
+814 Samsung Electronics (Foreign)(New).............. 148
+5,099 Samsung Electronics (New)....................... 920
**78,000 Shinhan Bank (Foreign).......................... 1,712
**30,436 Shinhan Bank RFD (Foreign)...................... 668
63,000 Yukong Ltd. (Foreign)........................... 2,176
--------
19,173
--------
MALAYSIA (0.1%)
735,000 Bandar Raya Developments Bhd.................... 1,048
--------
MEXICO (8.7%)
155,060 Alfa S.A. de C.V., Class A...................... 1,993
513,912 Apasco S.A., Class A............................ 2,111
4,877,920 Banacci, Class B................................ 8,190
763,554 Banacci, Class L................................ 1,137
+864,977 Cemex S.A. de C.V. CPO ADR...................... 5,703
#2,582,660 Cemex S.A., Class A............................. 8,525
+1,752,000 Cifra S.A. de C.V., Class C..................... 1,776
91,810 Coca-Cola Femsa S.A. ADR........................ 1,699
326,469 Empresas ICA S.A. ADR........................... 3,346
4,533,550 FEMSA, Class B.................................. 10,216
#+152,640 Grupo Carso S.A. ADR............................ 1,628
#1,476,655 Grupo Financiero Bancomer ADR................... 8,583
+7,541,700 Grupo Financiero Bancomer, Class B.............. 2,107
+257,551 Grupo Financiero Bancomer, Class L.............. 67
181,955 Grupo Televisa S.A. ADR......................... 4,094
#+107,663 Hylsamex S.A. ADR............................... 2,315
177,488 Panamerican Beverages, Inc., Class A............ 5,680
225,390 Telefonos de Mexico S.A. ADR, Class L........... 7,184
--------
76,354
--------
MOROCCO (1.7%)
20,000 BMCE............................................ 921
55,123 Groupe Ona...................................... 2,109
+188,100 SNI Maroc, series `V'........................... 9,218
58,221 Wafabank........................................ 2,509
--------
14,757
--------
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
PAKISTAN (2.6%)
33,480 Adamjee Insurance Co., Ltd...................... $ 101
+142,649 Cherat Cement Ltd............................... 184
+1,814 Crescent Investment Bank........................ 1
+6,459 Crescent Textile Mills Ltd...................... 4
+1,049,500 Dewan Salman Fibre.............................. 2,531
2,288,000 D.G. Khan Cement Ltd............................ 2,006
3,017,900 Fauji Fertilizer................................ 4,520
1,880,600 Karachi Electric Supply Corp.................... 1,457
+94,273 Muslim Commercial Bank.......................... 101
+1,256,519 Nishat Mills Ltd................................ 1,074
358,020 Pakistan State Oil Co........................... 2,773
+42,200 Pakistan Telecommunications..................... 3,793
+27,900 Pakistan Telecommunications GDS................. 2,427
+1,800,960 Sui Northern Gas................................ 1,566
+298,000 Zahur Textile Mills............................. 24
--------
22,562
--------
PERU (0.0%)
35 Cementos Lima S.A............................... --
--------
PHILIPPINES (5.5%)
4,235,962 Ayala Land, Inc., Class B....................... 5,168
+8,112,000 C&P Homes, Inc.................................. 5,953
+5,977,000 DMI Holdings, Inc............................... 2,142
16,698,330 JG Summit Holding, Class B...................... 4,584
818,588 Manila Electric Co., Class B.................... 6,679
12,893,816 Petron Corp..................................... 6,636
104,055 Philippine Long Distance Telephone Co., Class
B............................................. 5,653
2,031,420 San Miguel Corp., Class B....................... 6,931
+15,618,168 SM Prime Holdings, Inc., Class B................ 4,466
--------
48,212
--------
POLAND (0.8%)
20,000 Bre Bank........................................ 304
45,000 Debica.......................................... 679
***+33,400 Eastbridge...................................... 2,245
137,620 Elektrim........................................ 466
+2,085,038 International UNP Holdings...................... 703
+373,740 Mostostal Exports, S.A.......................... 735
11,125 Wedel S.A....................................... 368
15,735 Zywiec.......................................... 1,085
--------
6,585
--------
PORTUGAL (0.2%)
120,000 Filmes Lusomundo................................ 1,283
@+9,945 Portuguese Investment Fund Ltd. (The)........... 621
--------
1,904
--------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Emerging Markets Portfolio
22
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE EMERGING MARKETS PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
RUSSIA (4.0%)
***+462,150 Alliance Cellulose Ltd.......................... $ 9,295
***+54,035 Alliance Cellulose Ltd., Class B................ 1,500
+130,000 Edinaya Enegertics.............................. 4
+503,500 Irkutskenergo................................... 2,492
+252,000 LUKoil Holding.................................. 1,153
+7,850,000 Moscow Energy................................... 2,080
+605,000 Rostelecom...................................... 2,829
***+317,851 Russian Telecom Development Corp................ 3,179
***+400,000 SFMT, Inc....................................... 4,000
***+990 Storyfirst Communications, Inc., Class C........ 660
***+2,640 Storyfirst Communications, Inc., Class D........ 1,980
***+3,250 Storyfirst Communications, Inc., Class E........ 3,250
+88,909,000 Unified Energy System........................... 2,703
--------
35,125
--------
SOUTH AFRICA (2.3%)
44,830 Anglo American Industrial Corp., Ltd............ 2,038
700,000 Bidvest......................................... 4,705
860,000 Gencor.......................................... 2,996
@224,490 Morgan Stanley Africa Investment Fund, Inc...... 2,890
972,084 Sasol Ltd....................................... 7,960
--------
20,589
--------
TAIWAN (4.5%)
+1,873,000 Acer, Inc....................................... 4,324
+909,000 Advanced Semiconductor Engineering, Inc.,....... 2,199
3,492,000 China Steel Corp................................ 2,790
100,000 Far East Textiles............................... 95
+1,117,986 Mosel Vitelic Ltd............................... 3,319
+2,027,999 Shinkong Synthetic Fiber........................ 1,754
+3,812,800 Taiwan Semiconductor Manufacturing Co........... 11,947
3,905,836 United Micro Electronics Corp., Ltd............. 9,805
+336,000 Walsin Lihwa Corp. GDR.......................... 3,368
--------
39,601
--------
THAILAND (5.0%)
298,550 Advanced Information Services Co., Ltd.
(Foreign)..................................... 5,286
785,400 Bangkok Bank Ltd. (Foreign)..................... 9,541
2,398,300 Finance One Co., Ltd. (Foreign)................. 16,661
144,600 Shinawatra Computer Co., Ltd. (Foreign)......... 3,559
257,400 Thai Farmers Bank Ltd........................... 1,757
727,100 Thai Farmers Bank Ltd. (Foreign)................ 7,332
--------
44,136
--------
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
TURKEY (5.4%)
6,065,172 Aksa............................................ $ 1,867
2,868,000 Bagfas.......................................... 883
11,278,000 Borusan......................................... 2,269
+13,272,000 Bossa........................................... 948
+4,000,000 Demirbank TAS................................... 243
30,329,180 Ege Biracilik................................... 10,458
4,600,000 Ege Seramik..................................... 1,095
4,226,000 Erciyas Biracilik............................... 1,978
38,125,000 Eregli Demir.................................... 3,130
3,479,000 Guney Biracilik Ve Malt Sanayii................. 509
2,998,800 Migros.......................................... 2,290
85,761,000 Sabah........................................... 1,690
14,346,000 Sarkuysan....................................... 2,120
8,687,000 Tat Konserve Sanayli............................ 5,492
40,206,000 Tofas Turk Otomobil Fabrikasi................... 3,895
498,288 Tofas Turk Otomobil Fabrikasi GDR, Class E...... 249
28,340,000 Trakya Cam Sanayii.............................. 2,885
1,354,075 Turkas Petroculuk A.S........................... 239
#11,439,000 Turkiye Garanti Bankasi A.S..................... 958
220,482 Turkiye Garanti Bankasi ADR..................... 1,846
46,537,600 Yapi Ve Kredi Bankasi A.S....................... 1,911
--------
46,955
--------
UNITED KINGDOM (0.3%)
915,713 Lonrho plc...................................... 2,502
--------
ZIMBABWE (0.3%)
#+1,980,000 Trans Zambezi Industries Ltd.................... 2,871
+35,281 Trans Zambezi Industries Ltd., Class S.......... 51
--------
2,922
--------
TOTAL COMMON STOCKS (Cost $790,607).............................. 737,077
--------
PREFERRED STOCKS (10.8%)
BRAZIL (NON-VOTING STOCKS) (10.7%)
**1,754,000,000 Banco Bradesco S.A.............................. 15,339
+467,646,000 Banco do Brasil................................. 5,293
**295,998,880 Banco Nacional S.A.............................. 609
40,268,030 Brahma.......................................... 16,574
620,000 Brasmotor S.A................................... 123
73,517,103 Cia Energetica de Minas Gerais.................. 1,626
16,959,000 Cia Paulista de Forca E Luz..................... 454
84,212,850 Eletrobras, Class B............................. 22,788
32,803,800 Itaubanco....................................... 9,147
37,930,101 Lojas Americanas S.A............................ 890
105,758 Lojas Americanas S.A. (Bonus Shares Plan)....... 15
44,869,333 Petrobras....................................... 3,831
12,500 Sadia Concordia................................. 9
175,858,000 Telebras........................................ 8,468
32,080,815 Telecomunicacoes de Sao Paulo................... 4,720
526,000,000 Usiminas........................................ 428
21,118,000 Vale Do Rio Doce................................ 3,477
--------
93,791
--------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Emerging Markets Portfolio
23
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE EMERGING MARKETS PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
GREECE (0.1%)
121,458 Aegek........................................... $ 666
--------
INDIA (0.0%)
2,700 Fabworth (India) Ltd............................ 2
--------
PORTUGAL (0.0%)
35,340 Filmes Lusomundo................................ 330
--------
TOTAL PREFERRED STOCKS (Cost $88,639)............................ 94,789
--------
<CAPTION>
NO. OF
RIGHTS
- ---------------
<C> <S> <C>
RIGHTS (0.1%)
BRAZIL (0.0%)
**43,545 Banco Bradesco.................................. 113
--------
INDIA (0.1%)
**+9,610 Baroda Rayon Corp............................... --
+6,000 Federal Bank Ltd................................ 5
+674 Flex Industries Ltd............................. --
**+155,100 ITC Agrotech.................................... --
**+2 Nahar Spinning.................................. --
+133,300 SCICI Ltd. (Bonus).............................. 139
+55,000 Vysya Bank...................................... 618
--------
762
--------
PAKISTAN (0.0%)
+686,400 D.G. Khan Cement................................ 241
+20,625 Dewan Salman.................................... --
--------
241
--------
TOTAL RIGHTS (Cost $579)......................................... 1,116
--------
<CAPTION>
NO. OF
WARRANTS
- ---------------
<C> <S> <C>
WARRANTS (1.0%)
INDIA (0.1%)
**+33,571 Bharat Forge Co., Ltd. (New).................... 130
**+27,383 Flex Industries Ltd., expiring 11/23/97......... 103
**+44,702 Garware Plastics & Polyesters, expiring
4/04/98....................................... 346
--------
579
--------
INDONESIA (0.0%)
+274,600 Bank Bali, expiring 8/29/00..................... 120
--------
POLAND (0.0%)
**+1,014,000 International UNP Holdings...................... --
--------
RUSSIA (0.9%)
+9,640 LUKoil Holding.................................. 7,712
--------
THAILAND (0.0%)
**+10 Finance One Co., Ltd., expiring 3/15/99......... --
--------
TOTAL WARRANTS (Cost $10,050).................................... 8,411
--------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
CONVERTIBLE DEBENTURES (0.6%)
COLOMBIA (0.5%)
U.S.$ #5,615 Banco de Colombia 5.20%, 2/01/99................ $ 4,267
--------
INDIA (0.1%)
INR **33,574 DCM Shriram Industries Ltd. 15.00%, 3/02/02..... 448
1,650 Indian Seamless Steel & Alloys 10.00%,
7/13/96....................................... 27
130 Tata Iron & Steel, 2.25%, 4/01/99............... 116
--------
591
--------
TOTAL CONVERTIBLE DEBENTURES (Cost $6,122)....................... 4,858
--------
NON-CONVERTIBLE DEBENTURES (0.5%)
INDIA (0.5%)
3,357 Bharat Forge Co., Ltd., 14.50%, 4/18/02......... 43
34,055 DCM Shriram Industries Ltd., 16.50%, 3/02/02.... 599
4,470 Garware Plastics & Polyester, 16.00%, 4/04/98... 127
1,467 Mahavir Spinning Mills Ltd., Series A, 15.40%,
3/22/00....................................... 40
50,000 Raymond Ltd., 16.00%, 1/05/02................... 1,422
70,000 Saurashtra Cement & Chemicals Ltd., 18.00%,
11/27/98...................................... 2,239
--------
TOTAL NON-CONVERTIBLE DEBENTURES (Cost $5,071)................... 4,470
--------
LOAN AGREEMENTS (1.2%)
POLAND (0.0%)
U.S.$ #54 Republic of Poland Interest Arrears PDI Bonds,
3.75%, 10/27/14............................... 35
--------
RUSSIA (1.2%)
CHF ++11,910 Bank for Foreign Economic Affairs (Floating
Rate)......................................... 3,485
U.S.$ ++21,003 Bank for Foreign Economic Affairs (Floating
Rate)......................................... 7,167
--------
10,652
--------
TOTAL LOAN AGREEMENTS (Cost $9,781).............................. 10,687
--------
TOTAL FOREIGN SECURITIES (98.3%) (Cost $910,849)................. 861,408
--------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Emerging Markets Portfolio
24
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE EMERGING MARKETS PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
FOREIGN CURRENCY (1.1%)
ARP 213 Argentine Peso.................................... $ 213
BRC 1,000 Brazilian Real.................................... 1,029
COP 512,134 Colombian Peso.................................... 517
HKD 2,753 Hong Kong Dollar.................................. 356
HUF 59,707 Hungarian Forint.................................. 437
INR 186,311 Indian Rupee...................................... 5,298
MXP 452 Mexican Peso...................................... 59
MAD 1,419 Morrocan Dirham................................... 168
PKR 12,099 Pakistani Rupee................................... 354
PSS 2,126 Peruvian New Sol.................................. 920
PLZ 224 Polish Zloty...................................... 91
LKR 8,042 Sri Lankan Rupee.................................. 150
TWD 5,118 Taiwan Dollar..................................... 187
THB 3,262 Thai Baht......................................... 129
--------
TOTAL FOREIGN CURRENCY (Cost $10,194)............................ 9,908
--------
TOTAL INVESTMENTS (99.4%) (Cost $921,043)........................ 871,316
--------
</TABLE>
<TABLE>
<CAPTION>
OTHER ASSETS (2.9%)
<S> <C> <C>
Receivable for Investments Sold................. $ 21,080
Dividends Receivable............................ 1,908
Receivable for Portfolio Shares Sold............ 1,139
Interest Receivable............................. 403
Foreign Withholding Tax Reclaim Receivable...... 112
Other........................................... 367 25,009
-------------
LIABILITIES (-2.3%)
Payable for Investments Purchased............... (12,102)
Investment Advisory Fees Payable................ (3,005)
Payable for Portfolio Shares Redeemed........... (2,038)
Bank Overdraft.................................. (1,487)
Custodian Fees Payable.......................... (400)
Deferred India Taxes............................ (308)
Administrative Fees Payable..................... (119)
Payable for India Stamp Duty Tax................ (101)
Sub-Administrative Fees Payable................. (34)
Net Unrealized Loss on Forward Foreign Currency
Exchange Contracts............................ (10)
Payable for India Taxes......................... (1)
Other Liabilities............................... (129) (19,734)
------------- --------
NET ASSETS (100%)................................................ $876,591
--------
--------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER
SHARE
Applicable to 66,716,021 outstanding $.001 par value shares
(authorized 500,000,000 shares)................................ $13.14
--------
--------
</TABLE>
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of forward foreign currency exchange contracts open at
December 31, 1995, the Portfolio is obligated to deliver foreign currency in
exchange for U.S. dollars as indicated below:
<TABLE>
<CAPTION>
IN NET
CURRENCY EXCHANGE UNREALIZED
TO DELIVER VALUE SETTLEMENT FOR VALUE LOSS
(000) (000) DATE (000) (000) (000)
- ---------- --------- ----------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C>
HKD 2,722 $ 352 1/02/96 U.S.$352 $ 352 $ --
PSS 2,000 866 1/02/96 U.S.$856 856 (10)
--------- --------- ---
$ 1,218 $ 1,208 $ (10)
--------- --------- ---
--------- --------- ---
</TABLE>
<TABLE>
<S> <C> <C>
- ------------------------------------------------
+ -- Non-income producing security
++ -- Non-income producing security -- in
default
* -- Restricted as to public resale. Total
value of restricted securities at
December 31, 1995, was $3,510 or 0.4% of
net assets. (Total cost $3,782).
** -- Securities (totaling U.S.$74,961 or 8.6%
of net assets at December 31, 1995)
valued at fair value -- See Note A-1
*** -- Security is valued at cost -- See Note
A-1
# -- 144A Securities -- Certain conditions for
public sale may exist
@ -- The fund is advised by an affiliate
ADR -- American Depositary Receipt
ADS -- American Depositary Shares
CPO -- Certificate of Participation
GDR -- Global Depositary Receipt
GDS -- Global Depositary Shares
RFD -- Ranked For Dividend
CHF -- Swiss Franc
<CAPTION>
- ---------------------------------------------------------------
</TABLE>
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- ----------------------------------------------------------------
Capital Equipment..................... $ 86,196 9.8%
Consumer Goods........................ 125,580 14.3
Energy................................ 116,660 13.3
Finance............................... 207,434 23.7
Loan Agreements....................... 10,687 1.2
Materials............................. 138,556 15.9
Multi-Industry........................ 76,846 8.8
Services.............................. 99,449 11.3
--------- -----
$ 861,408 98.3%
--------- -----
--------- -----
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Emerging Markets Portfolio
25
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE EUROPEAN EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (94.8%)
BELGIUM (2.9%)
+9,000 Arbed S.A......................................... $ 1,019
11,000 Delhaize Freres et Cie, 'Le Lion' S.A............. 456
12,000 G.I.B. Holdings Ltd............................... 527
55 G.I.B. Holdings Ltd. VVPR (New)................... 2
--------
2,004
--------
DENMARK (1.5%)
21,300 Unidanmark A/S, Class A (Registered).............. 1,054
--------
FINLAND (3.1%)
55,500 Amer-Yhtymae Oy, Class A.......................... 866
25,000 Huhtamaki Oy, Series 1............................ 604
+13,533 Merita, Ltd., Class A............................. 34
+10,500 Nokia AB Oy, Class A.............................. 413
20,000 Pohjola Insurance Co., Ltd., Class B.............. 257
--------
2,174
--------
FRANCE (13.9%)
23,500 Banque Nationale de Paris......................... 1,060
1,700 Bongrain S.A...................................... 958
7,000 Cie de Saint Gobain............................... 775
+10,000 Credit Lyonnaise CDI.............................. 480
15,000 Elf Aquitaine..................................... 1,105
8,000 Eridania Beghin-Say S.A........................... 1,372
+21,405 Legris Industries S.A............................. 697
4,100 Labinal S.A....................................... 455
7,000 Peugeot S.A....................................... 923
45,452 Thomson CSF....................................... 1,013
12,000 Total S.A., Class B............................... 810
--------
9,648
--------
GERMANY (11.9%)
6,000 BASF AG........................................... 1,352
5,000 Bayer AG.......................................... 1,328
+16,000 Bremer Vulkan Verbund AG.......................... 446
3,500 Commerzbank AG.................................... 831
2,200 Karstadt AG....................................... 902
2,500 Mannesmann AG..................................... 796
+3,700 Varta AG.......................................... 710
22,000 Veba AG........................................... 942
3,000 Volkswagen AG..................................... 1,006
--------
8,313
--------
ITALY (6.7%)
+518,000 Editoriale L'Expresso S.p.A....................... 897
+520,000 Impregilo S.p.A................................... 439
540,000 Olivetti S.p.A.................................... 433
200,700 Sogefi S.p.A...................................... 425
500,000 Stet Di Risp (NCS)................................ 1,020
205,500 Telecom Italia S.p.A.............................. 320
410,000 Telecom Italia S.p.A. Di Risp (NCS)............... 501
+242,200 Unicem Di Risp (NCS).............................. 614
--------
4,649
--------
NETHERLANDS (11.7%)
29,674 ABN Amro Holdings N.V............................. 1,352
<CAPTION>
VALUE
SHARES (000)
------------------------------------------------------------
<C> <S> <C>
9,500 Akzo Nobel N.V.................................... $ 1,099
950 DSM N.V........................................... 78
7,599 Hollandsche Beton Groep N.V....................... 1,160
13,084 Internationale Nederlanden Groep N.V.............. 874
13,000 Koninklijke Bijenkorf Beheer N.V.................. 859
30,468 Koninklijke PTT Nederland N.V..................... 1,107
25,000 Koninklijke Van Ommeren N.V....................... 779
23,500 Philips Electronics N.V........................... 849
--------
8,157
--------
NORWAY (1.9%)
200,000 Den Norske Bank A/S, Class A Free................. 524
5,113 Hafslund Nycomed, Class B......................... 130
53,000 Saga Petroleum A/S, Class B....................... 662
--------
1,316
--------
PORTUGAL (0.2%)
+@1,905 Portuguese Investment Fund........................ 119
--------
SPAIN (8.4%)
+100,000 Asturiana del Zinc S.A............................ 793
17,000 Banco de Santander S.A............................ 854
11,518 Bodegas y Bebidas S.A............................. 294
+107,870 Grupo Duro Felguera S.A........................... 381
110,000 Iberdrola S.A..................................... 1,007
106,000 Sevillana de Electricidad S.A..................... 823
125,000 Telefonica Nacional de Espana S.A................. 1,731
--------
5,883
--------
SWEDEN (3.0%)
1,700 Electrolux AB, Series B........................... 70
+50,000 Nordbanken AS..................................... 866
59,000 S.K.F. AB, Class B................................ 1,128
--------
2,064
--------
SWITZERLAND (15.1%)
+800 Ascom Holdings AG (Bearer)........................ 815
460 Bobst AG (Bearer)................................. 718
700 Ciba Geigy AG (Bearer)............................ 613
800 Ciba-Geigy AG (Registered)........................ 704
2,200 Forbo Holding AG (Registered)..................... 940
1,030 Hero Lenzburg AG (Bearer)......................... 509
1,400 Magazine Globus (Participating Certificates)...... 801
1,100 Nestle S.A. (Registered).......................... 1,217
+16,100 Oerlikon-Buehrle Holding AG (Registered).......... 1,312
1,000 Schweizerische Industrie-Gesellschaft Holdings
(Registered).................................... 1,014
1,800 Sulzer AG (Participating Certificates)............ 960
+1,200 SwissAir (Registered)............................. 874
--------
10,477
--------
UNITED KINGDOM (14.5%)
+145,500 Asprey plc........................................ 565
140,000 Associated British Foods plc...................... 802
20,000 Bass plc.......................................... 223
200,000 BET plc........................................... 394
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
European Equity Portfolio
28
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE EUROPEAN EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
------------------------------------------------------------
<C> <S> <C>
UNITED KINGDOM (CONT.)
70,000 BSM Group plc..................................... $ 168
32,800 Calor Group plc................................... 130
350,000 Christian Salvesen plc............................ 1,437
38,900 Courtaulds Textiles plc........................... 215
188,491 John Mowlem & Co. plc............................. 174
114,000 Kwik Save Group plc............................... 892
24,895 McAlpine (Alfred) plc............................. 57
101,075 Reckitt & Colman plc.............................. 1,119
298,566 Rolls-Royce plc................................... 876
202,527 Royal Insurance Holdings plc...................... 1,201
46,000 Sketchley plc..................................... 90
50,000 Tate & Lyle plc................................... 366
30,000 Unilever plc...................................... 616
300,000 WPP Group plc..................................... 764
--------
10,089
--------
TOTAL COMMON STOCKS (Cost $63,242)............................ 65,947
--------
PREFERRED STOCKS (3.0%)
GERMANY (3.0%)
2,500 RWE AG............................................ 698
3,000 Spar Handels AG................................... 644
3,200 Volkswagen AG..................................... 776
--------
TOTAL PREFERRED STOCKS (Cost $2,010).......................... 2,118
--------
TOTAL FOREIGN SECURITIES (97.8%) (Cost $65,252)............... 68,065
--------
<CAPTION>
FACE
AMOUNT
(000)
- ----------
<C> <S> <C>
SHORT-TERM INVESTMENT (0.5%)
REPURCHASE AGREEMENT (0.5%)
$ 336 The Chase Manhattan Bank N.A., 5.35%, dated
12/29/95, due 1/02/96, to be repurchased at
$336, collateralized by $250 United States
Treasury Bonds 8.875%, due 8/15/17, valued at
$342 (Cost $336)................................ 336
--------
FOREIGN CURRENCY (3.2%)
GBP 227 British Pound..................................... 352
DEM 1,788 Deutsche Mark..................................... 1,248
FIM 949 Finnish Markka.................................... 218
ITL 751 Italian Lira...................................... --
NLG 121 Netherlands Guilder............................... 76
ESP 2 Spanish Peseta.................................... --
SEK 2,077 Swedish Krona..................................... 313
--------
TOTAL FOREIGN CURRENCY (Cost $2,199).......................... 2,207
--------
TOTAL INVESTMENTS (101.5%) (Cost $67,787)..................... 70,608
--------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
-----
OTHER ASSETS (0.4%)
Receivable for Investments Sold................. $ 140
Dividends Receivable............................ 79
<CAPTION>
AMOUNT
(000)
------------------------------------------------------------
<S> <C> <C>
Foreign Withholding Tax Reclaim Receivable...... $ 62
Net Unrealized Gain on Forward Foreign Currency
Exchange Contracts............................. 20
Receivable for Portfolio Shares Sold............ 10
Other........................................... 2 $ 313
-----
LIABILITIES (-1.9%)
Payable for Investments Purchased............... (710)
Payable for Portfolio Shares Redeemed........... (457)
Investment Advisory Fees Payable................ (112)
Custodian Fees Payable.......................... (12)
Administrative Fees Payable..................... (11)
Other Liabilities............................... (36) (1,338)
----- --------
NET ASSETS (100%)............................................. $69,583
--------
--------
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 4,999,857 outstanding $.001 par value shares
(authorized 500,000,000 shares)............................. $13.92
--------
--------
------------------------------------------------------------------------
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of forward foreign currency exchange contracts open at
December 31, 1995, the Portfolio is obligated to deliver foreign
currency in exchange for U.S. dollars or foreign currency as indicated
below:
</TABLE>
<TABLE>
<CAPTION>
IN NET
CURRENCY EXCHANGE UNREALIZED
TO DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
- ---------- --------- ----------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C>
NLG 121 $ 75 1/02/96 U.S.$ 75 $ 75 $ --
ESP 9,556 79 1/03/96 DEM 113 79 --
CHF 2,750 2,422 6/10/96 U.S.$2,420 2,420 (2)
DEM 3,000 2,107 6/10/96 U.S.$2,152 2,152 45
FRF 7,100 1,451 6/10/96 U.S.$1,422 1,422 (29)
DEM 400 282 8/09/96 U.S.$ 288 288 6
--------- --------- ---
$ 6,416 $ 6,436 $ 20
--------- --------- ---
--------- --------- ---
</TABLE>
- ------------------------------------------------------------
<TABLE>
<S> <C> <C>
+ -- Non-income producing security
@ -- The fund is advised by an affiliate.
CDI -- Certificate of Investment
NCS -- Non Convertible Shares
CHF -- Swiss Franc
FRF -- French Franc
</TABLE>
- ------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
(UNAUDITED)
<S> <C> <C>
VALUE PERCENT
INDUSTRY (000) OF NET ASSETS
<CAPTION>
- -----------------------------------------------------------------
<S> <C> <C>
Capital Equipment................... $ 11,080 15.9%
Consumer Goods...................... 14,873 21.4
Energy.............................. 5,170 7.4
Finance............................. 9,945 14.3
Materials........................... 11,835 17.0
Multi-Industry...................... 2,559 3.7
Services............................ 12,603 18.1
--------- ---
$ 68,065 97.8%
--------- ---
--------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
European Equity Portfolio
29
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE GLOBAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (81.7%)
AUSTRALIA (1.2%)
50,000 Brambles Industries Ltd........................... $ 557
120,000 Westpac Banking Corp.............................. 532
--------
1,089
--------
CANADA (0.4%)
22,900 Hudson's Bay Co................................... 329
--------
FRANCE (5.0%)
10,300 Banque Nationale de Paris......................... 465
1,870 Bongrain S.A...................................... 1,054
+12,000 Credit Lyonnaise CDI.............................. 576
19,266 Elf Aquitaine..................................... 1,419
4,900 Labinal S.A....................................... 543
11,965 Valeo S.A......................................... 554
--------
4,611
--------
GERMANY (6.6%)
5,200 BASF AG........................................... 1,171
3,822 Bayer AG.......................................... 1,015
3,600 Karstadt AG....................................... 1,476
3,000 Mannesmann AG..................................... 955
2,764 Sinn AG........................................... 520
+2,225 Varta AG.......................................... 427
10,100 Veba AG........................................... 433
260 Volkswagen AG..................................... 87
--------
6,084
--------
IRELAND (2.9%)
757,742 Anglo Irish Bank Corp. plc........................ 728
73,900 Arnotts plc....................................... 385
470,000 Avonmore Foods plc, Class A....................... 956
229,312 Green Property plc................................ 617
--------
2,686
--------
ITALY (2.0%)
500,000 Stet Di Risp (NCS)................................ 1,020
700,000 Telecom Italia S.p.A. Di Risp (NCS)............... 856
--------
1,876
--------
JAPAN (9.7%)
160 East Japan Railway Co............................. 778
65,000 Fuji Photo Film Ltd............................... 1,876
24,000 Hitachi Ltd....................................... 242
110,000 Kao Corp.......................................... 1,364
155,000 Nichido Fire & Marine Insurance Co................ 1,246
18,000 Sony Corp......................................... 1,079
100,000 Sumitomo Rubber Industries........................ 835
5,000 TDK Corp.......................................... 255
40,000 Toyo Seikan Kaisha Ltd............................ 1,197
--------
8,872
--------
NETHERLANDS (6.5%)
39,606 ABN Amro Holdings N.V............................. 1,804
2,101 Hollandsche Beton Groep N.V....................... 321
23,159 Internationale Nederlanden Groep N.V.............. 1,547
40,000 Koninklijke Van Ommeren N.V....................... 1,246
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
15,160 Nedlloyd Groep N.V................................ $ 344
20,000 Philips Electronics N.V........................... 723
--------
5,985
--------
SINGAPORE (0.7%)
220,000 Jardine Strategic Holdings, Inc................... 673
--------
SPAIN (2.6%)
89,500 Iberdrola S.A..................................... 819
112,300 Telefonica de Espana S.A.......................... 1,555
--------
2,374
--------
SWITZERLAND (6.2%)
+500 Ascom Holding AG (Bearer)......................... 509
800 Bobst AG (Bearer)................................. 1,248
1,800 Ciba-Geigy AG (Registered)........................ 1,584
1,400 Forbo Holding AG (Registered)..................... 599
1,400 Magazine Globus (Participating Certificates)...... 801
900 Schweizerische Industrie-Gesellschaft Holdings
(Registered).................................... 913
--------
5,654
--------
UNITED KINGDOM (5.8%)
28,500 Calor Group plc................................... 113
298,700 Christian Salvesen plc............................ 1,227
40,300 Forte plc......................................... 207
100,000 John Mowlem & Co. plc............................. 92
150,000 Kwik Save Group plc............................... 1,174
180,000 Matthews (Bernard) plc............................ 265
+**653,333 Pentos plc........................................ --
102,115 Pilkington plc.................................... 320
73,902 Rolls-Royce plc................................... 218
46,400 Unilever plc...................................... 953
279,000 WPP Group plc..................................... 710
--------
5,279
--------
UNITED STATES (32.1%)
+89,000 Addington Resources, Inc.......................... 1,302
18,000 Aluminum Company of America....................... 952
+15,400 AMR Corp.......................................... 1,143
32,100 Bank of New York Co., Inc......................... 1,565
+50,500 Beazer Homes USA, Inc............................. 1,042
+128,000 Cadiz Land Co., Inc............................... 736
+*22,000 Cadiz Land Co., Inc. (acquired 4/17/94, Cost
$88)............................................ 127
108,000 Comsat Corp....................................... 2,012
+40,000 Cray Research, Inc................................ 990
+80,000 Data General Corp................................. 1,100
+99,500 Egghead, Inc...................................... 640
50,000 Enhance Financial Services Group, Inc............. 1,331
45,000 Finova Group, Inc................................. 2,170
16,000 Gap, Inc.......................................... 671
2,000 General Motors Corp............................... 106
+134,200 GenRad, Inc....................................... 1,292
16,000 Georgia Pacific Corp.............................. 1,098
2,600 Houghton Mifflin Co............................... 112
+31,000 Kaiser Ventures, Inc.............................. 403
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Global Equity Portfolio
32
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE GLOBAL EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
UNITED STATES (CONT.)
24,300 Lukens, Inc....................................... $ 699
13,000 MBIA, Inc......................................... 975
61,400 MCI Communications Corp........................... 1,604
23,300 Mellon Bank Corp.................................. 1,252
+31,300 Nexthealth Inc.................................... 98
18,600 Philip Morris Cos., Inc........................... 1,683
12,000 Prime Retail, Inc................................. 143
25,000 Sun Co., Inc...................................... 684
13,100 Tecumseh Products Co., Class A.................... 678
27,000 UST Corp.......................................... 392
+70,000 Waban, Inc........................................ 1,313
+107,000 WorldCorp, Inc.................................... 1,070
--------
29,383
--------
TOTAL COMMON STOCKS (Cost $66,115)........................... 74,895
--------
PREFERRED STOCKS (0.8%)
GERMANY (0.8%)
3,000 Volkswagen AG (Cost $647)......................... 728
--------
CONVERTIBLE PREFERRED SECURITY (0.0%)
SINGAPORE (0.0%)
+21,000 Jardine Strategic Holdings, Inc., IDR, 7.50%,
5/07/97, (Cost $ 21)............................ 23
--------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
RIGHTS
- -----------
<C> <S> <C>
RIGHTS (0.1%)
UNITED KINGDOM (0.1%)
+25,528 Pilkington plc (Cost $61)......................... 79
--------
TOTAL FOREIGN & U.S. SECURITIES (82.6%) (Cost $66,844)......... 75,725
--------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
- -----------
<C> <S> <C>
SHORT-TERM INVESTMENT (2.3%)
REPURCHASE AGREEMENT (2.3%)
$ 2,145 The Chase Manhattan Bank, N.A., 5.35%, dated
12/29/95 due 1/02/96, to be repurchased at
$2,147, collateralized by $1,975 United States
Treasury Bonds, 7.50%, due 11/15/01, valued at
$2,190 (Cost $2,145)............................ 2,145
--------
FOREIGN CURRENCY (0.6%)
GBP 4 British Pound..................................... 6
JPY 1,014 Japanese Yen...................................... 10
NLG 812 Netherlands Guilder............................... 506
ESP 2 Spanish Peseta.................................... --
SEK 1 Swedish Krona..................................... --
--------
TOTAL FOREIGN CURRENCY (Cost $519)............................. 522
--------
TOTAL INVESTMENTS (85.5%) (Cost $69,508)....................... 78,392
--------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- ------------------------------------------------------------
OTHER ASSETS (14.9%)
Receivable for Portfolio Shares Sold............ $10,259
Receivable for Investments Sold................. 3,158
Dividends Receivable............................ 135
Foreign Withholding Tax Reclaim Receivable...... 55
Interest Receivable............................. 1
Other........................................... 6 $13,614
-----------
LIABILITIES (-0.4%)
Investment Advisory Fees Payable................ (141)
Unrealized Loss on Forward Foreign Currency
Exchange Contracts............................ (131)
Custodian Fees Payable.......................... (12)
Administrative Fees Payable..................... (12)
Payable for Investments Purchased............... (2)
Other Liabilities............................... (33) (331 )
----------- --------
NET ASSETS (100%).............................................. $91,675
--------
--------
</TABLE>
<TABLE>
<C> <S> <C>
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 6,408,275 outstanding $.001 par value
shares (authorized 500,000,000 shares)....................... $14.31
--------
--------
</TABLE>
- ------------------------------------------------
<TABLE>
<C> <S> <C>
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of forward foreign currency exchange contracts open at
December 31, 1995, the Portfolio is obligated to deliver foreign
currency in exchange for U.S. dollars as indicated below:
</TABLE>
<TABLE>
<CAPTION>
IN
CURRENCY TO EXCHANGE UNREALIZED
DELIVER VALUE SETTLEMENT FOR VALUE LOSS
(000) (000) DATE (000) (000) (000)
- ----------- --------- ----------- ---------- --------- -----------------
<S> <C> <C> <C> <C> <C>
JPY 9,167 $ 89 1/04/96 U.S.$ 89 $ 89 $ --
NLG 10,090 6,305 2/23/96 U.S.$6,174 6,174 (131)
--------- --------- -----
$ 6,394 $ 6,263 $ (131)
--------- --------- -----
--------- --------- -----
</TABLE>
- ------------------------------------------------------------
<TABLE>
<S> <C> <C>
+ -- Non-income producing security
* -- Restricted as to public resale. Total value of
restricted securities at December 31, 1995 was $127
or 0.1% of net assets. (Total cost $88)
** -- Security is valued at fair value -- See Note A-1
CDI -- Certificate of Investment
IDR -- International Depositary Receipt
NCS -- Non Convertible Shares
</TABLE>
- ------------------------------------------------------------
SUMMARY OF FOREIGN & U.S. SECURITIES BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
(UNAUDITED)
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- -----------------------------------------------------------------
<S> <C> <C>
Capital Equipment...................... $ 16,075 17.5%
Consumer Goods......................... 11,364 12.4
Energy................................. 5,725 6.2
Finance................................ 16,017 17.5
Materials.............................. 7,645 8.3
Multi-Industry......................... 4,867 5.4
Services............................... 14,032 15.3
--------- ---
$ 75,725 82.6%
--------- ---
--------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Global Equity Portfolio
33
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE GOLD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------
COMMON STOCKS (92.1%)
AUSTRALIA (35.8%)
+55,000 Acacia Resources Ltd. ............................ $ 99
+50,000 Delta Gold N.L. .................................. 121
260,000 Gold Mines of Kalgoorlie Ltd. .................... 242
+200,000 Great Central Mines N.L. ......................... 386
90,000 Newcrest Mining Ltd. ............................. 379
135,000 Plutonic Resources, Ltd. ......................... 642
275,000 Poseidon Gold Ltd. ............................... 548
+225,000 Wiluna Mines Ltd. ................................ 232
--------
2,649
--------
CANADA (24.5%)
+169,600 Bema Gold Corp. .................................. 339
+91,100 Bolivar Goldfields Ltd. .......................... 50
+9,000 Bre-X Minerals, Ltd. ............................. 349
+97,000 Dakota Mining Corp. .............................. 146
20,000 Glamis Gold Ltd. ................................. 125
11,400 Placer Dome, Inc. ................................ 275
+100,000 Royal Oak Mines, Inc. ............................ 356
+25,000 TVX Gold, Inc. ................................... 176
--------
1,816
--------
SOUTH AFRICA (4.4%)
6,000 Driefontein Consolidated Ltd., ADR................ 74
14,000 Free State Consolidated Gold Mines Ltd. ADR....... 101
4,200 Kloof Gold Mining Co., Ltd. ADR................... 40
17,500 Vaal Reefs Exploration & Mining Co., Ltd. ADR..... 112
--------
327
--------
UNITED STATES (27.4%)
7,000 Freeport McMoRan Copper & Gold, Inc., Class B..... 197
+30,000 Gold Reserve Corp. ............................... 169
23,000 Homestake Mining Co. ............................. 359
6,000 Newmont Mining Corp. ............................. 272
+25,000 Pegasus Gold, Inc. ............................... 347
20,000 Santa Fe Pacific Gold Corp. ...................... 243
+23,000 Stillwater Mining Co. ............................ 442
--------
2,029
--------
TOTAL COMMON STOCKS (Cost $7,147).............................. 6,821
--------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
- -----------
<C> <S> <C>
WARRANTS (0.0%)
UNITED STATES (0.0%)
+25,000 Gold Reserve Corp., expiring 3/96 (Cost $0)....... 4
--------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------
CONVERTIBLE BONDS (2.9%)
UNITED STATES (2.9%)
$ #250 Canyon Resources 6.00%, 6/01/98 (Cost $276)....... $ 212
--------
TOTAL FOREIGN & U.S. SECURITIES (95.0%) (Cost $7,423).......... 7,037
--------
SHORT-TERM INVESTMENT (3.9%)
REPURCHASE AGREEMENT (3.9%)
287 The Chase Manhattan Bank, N.A., 5.35%, dated
12/29/95, due 1/2/96, to be repurchased at $287,
collateralized by $265 United States Treasury
Bonds, 7.50%, due 11/15/01, valued at $294 (Cost
$287)........................................... 287
--------
TOTAL INVESTMENTS (98.9%) (Cost $7,710)........................ 7,324
--------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (1.7%)
Cash............................................ $ 1
Receivable for Investments Sold................. 106
Receivable from Investment Adviser.............. 16
Dividends Receivable............................ 2
Interest Receivable............................. 1 126
-----
LIABILITIES (-0.6%)
Investment Sub-Advisory Fees Payable............ (7)
Custodian Fees Payable.......................... (5)
Administrative Fees Payable..................... (2)
Other Liabilities............................... (27) (41)
----- --------
NET ASSETS (100%).............................................. $ 7,409
--------
--------
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 866,575 outstanding $.001 par value shares
(authorized 500,000,000 shares).............................. $8.55
--------
--------
</TABLE>
- ------------------------------------------------------------
<TABLE>
<S> <C> <C>
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of forward foreign currency exchange contracts open at
December 31, 1995, the Portfolio is obligated to deliver foreign
currency in exchange for U.S. dollars as indicated below:
</TABLE>
<TABLE>
<CAPTION>
CURRENCY TO IN EXCHANGE UNREALIZED
DELIVER FOR GAIN (LOSS)
(000) VALUE (000) SETTLEMENT DATE (000) VALUE (000) (000)
- --------------- ----- ---------------- ----------- ----- -------------
<S> <C> <C> <C> <C> <C>
AUD 56 $ 42 1/02/96 U.S.$42 $ 42 $ --
</TABLE>
- ------------------------------------------------
<TABLE>
<S> <C> <C>
+ -- Non-income producing security
# -- 144A Security -- Certain conditions for public sale
may exist.
ADR -- American Depositary Receipt
</TABLE>
- ------------------------------------------------
SUMMARY OF FOREIGN & U.S. SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- -----------------------------------------------------------------
Gold Mines............................. $ 7,037 95.0%
--------- -----
--------- -----
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Gold Portfolio
36
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE INTERNATIONAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (88.4%)
AUSTRALIA (4.6%)
3,535,000 Brambles Industries Ltd........................... $ 39,411
5,069,000 CSR Ltd........................................... 16,502
+402,000 McPherson's Ltd................................... 57
3,934,882 Westpac Banking Corp.............................. 17,430
----------
73,400
----------
BELGIUM (1.1%)
+52,500 Arbed S.A......................................... 5,940
254,000 G.I.B. Holdings Ltd............................... 11,151
2,156 G.I.B. Holdings Ltd. (New)........................ 92
----------
17,183
----------
DENMARK (1.8%)
88,000 Novo-Nordisk A/S, Class B......................... 12,036
350,000 Unidanmark A/S, Class A (Registered).............. 17,321
----------
29,357
----------
FINLAND (1.2%)
350,000 Huhtamaki Oy, Series 1............................ 8,449
+168,467 Merita, Ltd., Class A............................. 426
215,000 Nokia AB Oy, Series A............................. 8,453
125,200 Pohjola Insurance Co., Ltd., Class B.............. 1,612
----------
18,940
----------
FRANCE (7.2%)
249,500 Banque Nationale de Paris......................... 11,255
13,495 Bongrain S.A...................................... 7,606
133,000 Cie de Saint Gobain............................... 14,720
17,300 Cie Financiere de Paribas S.A., Class A........... 949
+153,050 Credit Lyonnaise CDI.............................. 7,345
246,975 Elf Aquitaine..................................... 18,197
119,100 Peugeot S.A....................................... 15,711
420,300 Thomson CSF S.A................................... 9,364
230,644 Total S.A., Class B............................... 15,565
324,045 Valeo S.A......................................... 15,008
----------
115,720
----------
GERMANY (10.8%)
110,000 BASF AG........................................... 24,779
105,000 Bayer AG.......................................... 27,885
50,000 Commerzbank AG.................................... 11,873
28,750 Hoechst AG........................................ 7,820
85,500 Karstadt AG....................................... 35,061
73,125 Mannesmann AG..................................... 23,280
+24,900 Varta AG.......................................... 4,775
+580,000 Veba AG........................................... 24,836
37,500 Volkswagen AG..................................... 12,579
----------
172,888
----------
HONG KONG (0.6%)
**90,600 China Light & Power Co., Ltd...................... 410
5,375,500 Hong Kong Land Holdings Ltd....................... 9,945
----------
10,355
----------
<CAPTION>
VALUE
SHARES (000)
------------------------------------------------------------
<C> <S> <C>
ITALY (2.2%)
+3,120,000 Olivetti Di Risp.................................. $ 2,501
+2,560,500 Olivetti Di Risp (NCS)............................ 1,301
+1,297,317 SME Meridonale.................................... 2,651
9,000,000 Stet Di Risp (NCS)................................ 18,360
4,720,000 Telecom Italia S.p.A.............................. 7,340
2,655,000 Telecom Italia S.p.A. Di Risp (NCS)............... 3,246
----------
35,399
----------
JAPAN (24.1%)
1,050,000 Aisin Seiki Co., Ltd.............................. 13,831
1,000,000 Canon, Inc........................................ 18,111
115,000 Chudenko Corp..................................... 3,943
1,345,000 Daibiru Corp...................................... 15,241
1,465,000 Daicel Chemical Industry Ltd...................... 8,329
660,000 Daikin Industries Ltd............................. 6,456
1,037,000 Dainippon Ink & Chemical, Inc..................... 4,831
3,600 East Japan Railway Co............................. 17,503
2,150,000 Fuji Photo Film Ltd............................... 62,053
2,700,000 Hitachi Ltd....................................... 27,196
2,100,000 Kao Corp.......................................... 26,034
650,000 Kirin Brewery Co., Ltd............................ 7,680
1,700,000 Matsushita Electric Industries Ltd................ 27,661
81,000 Murata Manufacturing Co., Ltd..................... 2,981
2,400,000 Nichido Fire & Marine Insurance Co., Ltd.......... 19,293
1,836 Nippon Telegraph & Telephone Corp................. 14,848
221,000 Ryosan Co......................................... 6,079
350,000 Sony Corp......................................... 20,983
1,080,000 Stanley Electric Co............................... 6,485
1,450,000 Sumitomo Marine & Fire Insurance Co............... 11,909
3,000,000 Sumitomo Rubber Industries........................ 25,046
298,000 TDK Corp.......................................... 15,210
742,000 Toyo Seikan Kaisha Ltd............................ 22,206
37,150 Yurtec Corp....................................... 651
----------
384,560
----------
NETHERLANDS (9.3%)
705,168 ABN Amro Holdings N.V............................. 32,123
112,500 Akzo Nobel N.V.................................... 13,012
81,059 Hollandsche Beton Groep N.V....................... 12,376
575,744 Internationale Nederlanden Groep N.V.............. 38,462
247,500 Koninklijke Bijenkorf Beheer N.V.................. 16,349
153,050 Nedlloyd Groep N.V................................ 3,472
773,000 Philips Electronics N.V........................... 27,938
39,415 Unilever N.V. (Certificate)....................... 5,539
----------
149,271
----------
NEW ZEALAND (0.4%)
2,144,627 Fisher & Paykel Industries Ltd.................... 6,520
+**392,500 Smith City Group Ltd.............................. --
----------
6,520
----------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
International Equity Portfolio
43
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE INTERNATIONAL EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
------------------------------------------------------------
<C> <S> <C>
NORWAY (1.4%)
3,180,000 Den Norske Bank A/S,.............................. $ 8,341
573,800 Hafslund Nycomed, Class B......................... 14,551
----------
22,892
----------
SINGAPORE (2.1%)
9,950,000 Jardine Strategic Holdings, Inc................... 30,447
3,265,000 Neptune Orient Lines Ltd. (Foreign)............... 3,670
----------
34,117
----------
SPAIN (3.8%)
+297,500 Grupo Duro Felguera S.A........................... 1,050
2,345,000 Iberdrola S.A..................................... 21,459
2,710,000 Telefonica Nacional de Espana S.A................. 37,533
----------
60,042
----------
SWEDEN (3.0%)
28,600 Electrolux AB, Series B........................... 1,174
+350,000 Nordbanken AB..................................... 6,062
2,400,000 Skandinaviska Enskilda Banken, Class A............ 19,881
660,600 S.K.F. AB, Class B................................ 12,636
511,300 Svenska Cellulosa AB, Class B..................... 7,931
----------
47,684
----------
SWITZERLAND (5.9%)
+2,605 Ascom Holdings AG (Bearer)........................ 2,654
25,008 Ciba-Geigy AG (Registered)........................ 22,005
16,000 Forbo Holding AG (Registered)..................... 6,838
33,000 Nestle S.A. (Registered).......................... 36,505
2,410 Schindler Holding AG (Participating
Certificates)................................... 2,496
15,550 Sulzer AG (Participating Certificates)............ 8,291
12,500 Sulzer AG (Registered)............................ 7,152
+10,815 SwissAir (Registered)............................. 7,876
----------
93,817
----------
UNITED KINGDOM (8.9%)
1,260,000 Associated British Foods plc...................... 7,218
1,360,104 Automated Security Holdings plc................... 570
4,905,000 Christian Salvesen plc............................ 20,142
1,487,721 Forte plc......................................... 7,634
2,524,100 Grand Metropolitan plc............................ 18,183
4,841,985 John Mowlem & Co. plc............................. 4,473
1,624,000 Kwik Save Group plc............................... 12,707
843,000 McAlpine (Alfred) plc............................. 1,937
+1,417,095 Pilkington plc.................................... 4,444
1,470,645 Reckitt & Colman plc.............................. 16,279
2,885,064 Rolls-Royce plc................................... 8,466
1,429,956 Royal Insurance Holdings plc...................... 8,480
755,000 Unilever plc...................................... 15,507
6,145,000 WPP Group plc..................................... 15,646
----------
141,686
----------
TOTAL COMMON STOCKS (Cost $1,152,875).......................... 1,413,831
----------
<CAPTION>
VALUE
SHARES (000)
------------------------------------------------------------
<C> <S> <C>
PREFERRED STOCKS (3.7%)
GERMANY (3.7%)
+5,200 Fag Kugelficsher AG............................... $ 646
77,700 RWE AG............................................ 21,675
29,525 Spar Handels AG................................... 6,342
125,000 Volkswagen AG..................................... 30,319
----------
TOTAL PREFERRED STOCKS (Cost $46,959).......................... 58,982
----------
CONVERTIBLE PREFERRED SECURITIES (0.1%)
HONG KONG (0.1%)
1,863,000 Jardine Strategic Holdings, Inc. IDR, 7.50%,
5/07/97......................................... 2,012
----------
NETHERLANDS (0.0%)
1,506 ABN Amro Holdings N.V............................. 6
2,196 International Nederlanden Groep N.V............... 12
----------
18
----------
TOTAL CONVERTIBLE PREFERRED SECURITIES (Cost $1,923)........... 2,030
----------
<CAPTION>
NO. OF
RIGHTS
- -----------
<C> <S> <C>
RIGHTS (0.1%)
UNITED KINGDOM (0.1%)
+354,273 Pilkington plc (Cost $843)........................ 1,100
----------
TOTAL FOREIGN SECURITIES (92.3%) (Cost $1,202,600)............. 1,475,943
----------
<CAPTION>
FACE
AMOUNT
(000)
- -----------
<C> <S> <C>
SHORT-TERM INVESTMENT (3.9%)
REPURCHASE AGREEMENT (3.9%)
$ 62,548 The Chase Manhattan Bank, N.A., 5.35%, dated
12/29/95, due 1/02/96, to be repurchased at
$62,585, collateralized by $40,380 United States
Treasury Bonds, 12.00%, due 8/15/13, valued at
$63,800 (Cost $62,548).......................... 62,548
----------
FOREIGN CURRENCY (3.4%)
AUD 3 Australian Dollar.............................. 3
GBP 14,074 British Pound.................................. 21,850
DEM 14,857 Deutsche Mark.................................. 10,361
FIM 22,998 Finnish Markka................................. 5,288
HKD 3 Hong Kong Dollar............................... --
ITL 174 Italian Lira................................... --
JPY 1,595,171 Japanese Yen................................... 15,450
NLG 44 Netherlands Guilder............................ 27
ESP 19 Spanish Peseta................................. --
SEK 2,753 Swedish Krona.................................. 415
----------
TOTAL FOREIGN CURRENCY (Cost $53,560).......................... 53,394
----------
TOTAL INVESTMENTS (99.6%) (Cost $1,318,708).................... 1,591,885
----------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
International Equity Portfolio
44
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE INTERNATIONAL EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
------------------------------------------------------------
OTHER ASSETS (1.9%)
Receivable for Portfolio Shares Sold............ $ 21,040
Net Unrealized Gain on Forward Foreign Currency
Exchange Contracts............................ 3,637
Receivable for Investments Sold................. 2,910
Dividends Receivable............................ 1,499
Foreign Withholding Tax Reclaim Receivable...... 1,136
Interest Receivable............................. 28
Other........................................... 103 $ 30,353
-----------
LIABILITIES (-1.5%)
Payable for Portfolio Shares Redeemed........... (10,574)
Payable for Investments Purchased............... (9,689)
Investment Advisory Fees Payable................ (2,986)
Administrative Fees Payable..................... (203)
Custodian Fees Payable.......................... (143)
Other Liabilities............................... (113) (23,708)
----------- ----------
NET ASSETS (100%).............................................. $1,598,530
----------
----------
</TABLE>
<TABLE>
<C> <S> <C>
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 105,547,323 outstanding $.001 par value shares
(authorized 500,000,000 shares).............................. $15.15
----------
----------
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of forward foreign currency exchange contracts open at
December 31, 1995, the Portfolio is obligated to deliver or is to receive
foreign currency in exchange for U.S. dollars or foreign currency as
indicated below:
</TABLE>
<TABLE>
<CAPTION>
NET
IN UNREALIZED
CURRENCY EXCHANGE GAIN
TO DELIVER VALUE SETTLEMENT FOR VALUE (LOSS)
(000) (000) DATE (000) (000) (000)
- ------------------ -------- ----------- ------------ -------- ---------
<S> <C> <C> <C> <C> <C>
FIM 1,602 $ 368 1/02/96 DEM 526 $ 366 $ (2)
SGD 354 251 1/04/96 U.S.$ 251 251 --
U.S.$ 251 251 1/04/96 SGD 354 251 --
SGD 394 278 1/05/96 U.S.$ 278 278 --
DEM 95,500 66,730 3/01/96 U.S.$ 66,193 66,193 (537)
DEM 40,000 28,160 8/09/96 U.S.$ 28,751 28,751 591
FRF 153,000 31,289 10/11/96 U.S.$ 30,551 30,551 (738)
JPY 5,801,100 58,287 10/11/96 U.S.$ 61,000 61,000 2,713
NLG 118,000 74,654 11/14/96 U.S.$ 76,106 76,106 1,452
ESP 5,400,000 43,036 12/02/96 U.S.$ 42,584 42,584 (452)
JPY 3,100,000 31,341 12/24/96 U.S.$ 31,951 31,951 610
-------- -------- ---------
$334,645 $338,282 $ 3,637
-------- -------- ---------
-------- -------- ---------
</TABLE>
- ------------------------------------------------------------
<TABLE>
<S> <C> <C>
+ -- Non-income producing security
** -- Security is valued at fair value -- See Note A-1
CDI -- Certificate of Investment
IDR -- International Depositary Receipt
NCS -- Non Convertible Shares
FRF -- French Franc
SGD -- Singapore Dollar
</TABLE>
- ------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT
INDUSTRY (000) OF NET ASSETS
<S> <C> <C>
- ---------------------------------------------------------------
Capital Equipment................. $ 312,212 19.5%
Consumer Goods.................... 385,335 24.1
Energy............................ 80,467 5.0
Finance........................... 224,994 14.1
Materials......................... 195,044 12.2
Multi-Industry.................... 61,125 3.8
Services.......................... 216,766 13.6
--------- ---
$1,475,943 92.3%
--------- ---
--------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
International Equity Portfolio
45
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE INTERNATIONAL SMALL CAP PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
------------------------------------------------------------
COMMON STOCKS (93.9%)
AUSTRALIA (7.9%)
92,344 Arnotts Ltd....................................... $ 618
564,678 Auspine Ltd....................................... 1,645
+990,079 Bains Harding Ltd................................. 316
1,566,167 BRL Hardy Ltd..................................... 2,503
140,833 BRL Hardy Ltd. (New).............................. 225
1,100,000 Burswood Property Trust........................... 1,472
2,351,732 Country Road Ltd.................................. 3,059
2,186,801 E.R.G. Ltd........................................ 2,617
+467,800 McPherson's Ltd................................... 66
5,638,088 Parbury Ltd....................................... 2,179
1,721,500 Solution 6 Holdings Ltd........................... 1,024
----------
15,724
----------
DENMARK (1.8%)
+107,000 SYD-Sonderjylland Holdings........................ 3,466
----------
FINLAND (2.7%)
125,000 Amer-Yhtymae Oy, Class A.......................... 1,951
180,000 Hartwall Oy, Class A.............................. 3,352
----------
5,303
----------
FRANCE (8.2%)
72,000 Dauphin O.T.A..................................... 2,941
54,000 De Dietrich et Compagnie.......................... 2,371
31,150 Europeene de Propulsion S.A....................... 2,125
8,100 Galeries Layfayette............................... 1,975
+17,700 Legris Industries S.A............................. 576
24,500 Precision Mecaniques Labinal S.A.................. 2,717
91,756 Sediver S.A....................................... 3,560
----------
16,265
----------
GERMANY (5.3%)
13,000 Duerr Beteiligungs AG............................. 3,889
10,688 Sinn AG........................................... 2,013
+20,000 Varta AG.......................................... 3,836
2,210 Vossloh AG........................................ 729
----------
10,467
----------
HONG KONG (1.9%)
445,000 Jardine International Motor Holdings Ltd.......... 506
+5,200,000 Pico Far East Holdings Ltd........................ 666
780,000 Tungtex Holdings Co., Ltd......................... 80
5,862,000 Vitasoy International Holdings Ltd................ 2,502
----------
3,754
----------
IRELAND (2.0%)
1,070,000 Avonmore Foods plc, Class A....................... 2,176
692,472 Green Property plc................................ 1,863
----------
4,039
----------
ITALY (2.4%)
+1,172,800 Editoriale L'Expresso S.p.A....................... 2,031
+754,000 Unicem Di Risp (NCS).............................. 1,913
81,000 Vincenzo Zucchi S.p.A............................. 408
212,500 Vincenzo Zucchi S.p.A. (NCS)...................... 468
----------
4,820
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
------------------------------------------------------------
JAPAN (12.7%)
15,000 Exedy Corp........................................ $ 238
231,000 Foster Electric Co., Ltd.......................... 1,425
+175,000 Hankyu Realty..................................... 1,422
707,000 Japan Oil Transportation.......................... 4,451
213,000 Japan Vilene Co., Ltd............................. 1,343
134,000 Kansei Corp....................................... 1,085
243,000 Kirin Beverage Corp............................... 3,272
124,000 Nifco, Inc........................................ 1,621
335,000 Nissan Fire & Insurance Co........................ 2,349
549,000 Toc Co............................................ 5,477
+327,000 Tokai Senko K.K................................... 1,302
170,000 Toyoda Gosei Co................................... 1,177
----------
25,162
----------
NETHERLANDS (6.9%)
+62,600 Ahrend Groep N.V.................................. 2,060
26,800 Hollandsche Beton Groep N.V....................... 4,092
28,885 Industriemij Welna N.V............................ 837
141,000 Koninklijke Van Ommeren N.V....................... 4,393
36,000 Konin Nijverdal -- Ten Carte N.V.................. 1,519
8,802 Polynorm N.V...................................... 751
----------
13,652
----------
NEW ZEALAND (2.0%)
659,729 Fisher & Paykel Industries Ltd.................... 2,005
1,634,800 Whitcoulls Group Ltd.............................. 2,031
----------
4,036
----------
NORWAY (0.8%)
11,500 Adelsten, Class B................................. 1,136
+228,020 Oceanor........................................... 522
----------
1,658
----------
SPAIN (5.2%)
+346,000 Asturiana del Zinc S.A............................ 2,744
92,840 Bodegas y Bebidas S.A............................. 2,373
92,770 Gas y Electricidad S.A............................ 5,193
----------
10,310
----------
SWITZERLAND (16.9%)
3,715 Bobst AG (Bearer)................................. 5,797
4,965 Bucher Holdings AG (Bearer)....................... 2,841
9,800 Edipresse S.A. (Bearer)........................... 2,634
7,400 Elco Looser Holding AG (Registered)............... 3,015
3,400 Hero AG (Bearer).................................. 1,680
995 Kouni Reisen Holdings, Class B (Registered)....... 1,596
2,750 LEM Holdings AG................................... 970
7,035 Magazine Globus (Participating Certificates)...... 4,025
5,850 Porst Holding AG (Bearer)......................... 1,009
590 Schweizerische Industrie-Gesellschaft Holdings
(Bearer)........................................ 1,233
4,400 Schweizerische Industrie-Gesellschaft Holdings
(Registered).................................... 4,463
+4,250 Von Moos Holding AG (Bearer)...................... 350
+4,160 Zellweger Luwa AG (Bearer)........................ 4,057
----------
33,670
----------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
International Small Cap Portfolio
48
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE INTERNATIONAL SMALL CAP PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
------------------------------------------------------------
<C> <S> <C>
UNITED KINGDOM (17.2%)
4,502,198 Anglo Irish Bank Corp. plc (British Pound
Shares)......................................... $ 4,438
+559,500 Asprey plc........................................ 2,172
31,700 Bespak plc........................................ 155
+895,000 Blagden Industries plc............................ 1,987
584,000 Bluebird Toys plc................................. 2,919
1,266,800 BSM Group plc..................................... 3,048
214,300 Church & Co. plc.................................. 1,211
+**2,540,850 Donelon Tyson plc................................. --
1,895,000 EFG plc........................................... 427
952,000 GEI International plc............................. 1,774
212,000 Hadleigh Industries Group plc..................... 599
2,340,000 Hobson plc........................................ 1,090
390,000 Hornby Group plc.................................. 951
223,000 International Business Communications (Holdings)
plc............................................. 990
877,294 John Mowlem & Co. plc............................. 810
35,365,100 Kendell plc....................................... 549
206,335 Mallett plc....................................... 266
2,662,000 Matthews (Bernard) plc............................ 3,926
157,500 Oriflame International S.A........................ 995
+**2,659,393 Pentos plc........................................ --
345,526 Perry Group plc................................... 783
1,600,000 Shandwick plc..................................... 907
72,000 Sketchley plc..................................... 141
800,000 The 600 Group plc................................. 1,950
275,000 Tibbett & Britten Group plc....................... 1,742
541,700 Waterman Partnership Holdings plc................. 336
----------
34,166
----------
TOTAL COMMON STOCKS (Cost $193,194)............................. 186,492
----------
PREFERRED STOCKS (3.8%)
GERMANY (3.8%)
59,900 Berentzen-Gruppe AG............................... 1,901
1,800 Jil Sander AG..................................... 1,324
7,745 Shaerf AG......................................... 1,053
10,550 Spar Handels AG................................... 2,266
5,410 Wuerttembergische Metallwarenfabrik AG............ 1,098
----------
TOTAL PREFERRED STOCKS (Cost $8,320)............................ 7,642
----------
<CAPTION>
NO. OF
WARRANTS
- ------------
<C> <S> <C>
WARRANTS (0.0%)
HONG KONG (0.0%)
+452,000 Pico Far East Holdings Ltd., expiring 4/30/96..... 2
----------
SWITZERLAND (0.0%)
+4,600 Zellweger Luwa AG, expiring 5/21/97............... 44
----------
TOTAL WARRANTS (Cost $68)....................................... 46
----------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
------------------------------------------------------------
CONVERTIBLE DEBENTURE (0.2%)
ITALY (0.2%)
ITL 518,000 Mediobanca S.p.A. 5.50%, 1/01/00
(Cost $329)..................................... $ 285
----------
TOTAL FOREIGN SECURITIES (97.9%) (Cost $201,911)................ 194,465
----------
SHORT-TERM INVESTMENT (0.2%)
REPURCHASE AGREEMENT (0.2%)
$ 337 The Chase Manhattan Bank, N.A., 5.35%, dated
12/29/95, due 1/02/96, to be repurchased at
$337, collateralized by $337 United States
Treasury Bonds, 8.875%, due 8/15/17, valued at
$348 (Cost $337)................................ 337
----------
FOREIGN CURRENCY (3.1%)
AUD 145 Australian Dollar................................... 108
GBP 1,147 British Pound....................................... 1,781
DEM 6,156 Deutsche Mark....................................... 4,293
HKD 359 Hong Kong Dollar.................................... 46
JPY 9 Japanese Yen........................................ --
NZD 63 New Zealand Dollar.................................. 41
----------
TOTAL FOREIGN CURRENCY (Cost $6,246)............................ 6,269
----------
TOTAL INVESTMENTS (101.2%) (Cost $208,494)...................... 201,071
----------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (0.7%)
Receivable for Investments Sold................. $ 820
Receivable for Portfolio Shares Sold............ 225
Dividends Receivable............................ 209
Foreign Withholding Tax Reclaim Receivable...... 199
Interest Receivable............................. 16
Other........................................... 12 1,481
------------
LIABILITIES (-1.9%)
Payable for Investments Purchased............... (1,492)
Net Unrealized Loss on Forward Foreign Currency
Exchange Contracts............................ (933)
Payable for Portfolio Shares Redeemed........... (882)
Investment Advisory Fees Payable................ (440)
Custodian Fees Payable.......................... (31)
Bank Overdraft.................................. (29)
Administrative Fees Payable..................... (27)
Other Liabilities............................... (49) (3,883)
------------ ----------
NET ASSETS (100%)............................................... $ 198,669
----------
----------
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 13,299,989 outstanding $.001 par
value shares (authorized 1,000,000,000
shares)......................................... $14.94
----------
----------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
International Small Cap Portfolio
49
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE INTERNATIONAL SMALL CAP PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of forward foreign currency exchange contracts open at
December 31, 1995, the Portfolio is obligated to deliver or is to receive
foreign currency in exchange for U.S. dollars or foreign currency as
indicated below:
</TABLE>
<TABLE>
<CAPTION>
IN NET
CURRENCY EXCHANGE UNREALIZED
TO DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
- ----------- --------- ---------- ------------ --------- -------------
<C> <C> <C> <S> <C> <C>
AUD 388 $ 289 1/03/96 U.S.$ 289 $ 289 --
DEM 587 410 1/04/96 JPY 42,205 409 (1)
CHF 8,750 7,636 3/04/96 U.S.$ 7,204 7,204 (432)
DEM 10,300 7,198 3/04/96 U.S.$ 7,099 7,099 (99)
ESP 675,000 5,521 3/04/96 U.S.$ 5,107 5,107 (414)
JPY 798,840 8,026 10/11/96 U.S.$ 8,400 8,400 374
U.S.$ 8,400 8,400 10/11/96 JPY 800,100 8,039 (361)
--------- --------- -----
$ 37,480 $ 36,547 $ (933)
--------- --------- -----
--------- --------- -----
</TABLE>
- ------------------------------------------------------------
<TABLE>
<S> <C> <C>
+ -- Non-income producing security
** -- Security is valued at fair value -- See Note A-1
NCS -- Non Convertible Shares
CHF -- Swiss Franc
ESP -- Spanish Peseta
ITL -- Italian Lira
</TABLE>
- ------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- ----------------------------------------------------------------
Capital Equipment..................... $ 47,307 23.8%
Consumer Goods........................ 49,238 24.8
Energy................................ 7,937 4.0
Finance............................... 20,583 10.4
Materials............................. 20,257 10.2
Multi-Industry........................ 3,540 1.8
Services.............................. 45,603 22.9
--------- -----
$ 194,465 97.9%
--------- -----
--------- -----
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
International Small Cap Portfolio
50
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE JAPANESE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------
COMMON STOCKS (89.9%)
CAPITAL EQUIPMENT (31.1%)
240,000 Amada Co., Ltd.................................... $ 2,371
132,000 Dai Nippon Printing Co., Ltd...................... 2,237
136,000 Daifuku........................................... 1,923
146,000 Daikin Industries Ltd............................. 1,428
77,000 Fuji Machine Manufacturing Co..................... 2,759
80,000 Kurita Water Industries........................... 2,131
39,000 Kyocera Ltd....................................... 2,897
90,000 Kyudenko Co., Ltd................................. 1,185
60,000 Matsui Construction............................... 467
80,000 Matsushita Communication Industries............... 1,860
360,000 Mitsubishi Heavy Industries Ltd................... 2,870
67,000 Nifco, Inc........................................ 876
80,000 Nippon Pillar Packing............................. 1,023
294,000 Obayashi Corp..................................... 2,335
240,000 Ricoh Co., Ltd.................................... 2,626
300,000 Taisei Corp., Ltd................................. 2,001
260,000 Teijin Seiki Co., Ltd............................. 1,334
62,000 Tokyo Electron Ltd................................ 2,402
60,000 Toshiba Engineering & Construction................ 494
320,000 Tsubakimoto Chain................................. 1,925
----------
37,144
----------
CONSUMER GOODS (14.9%)
113,000 Canon, Inc........................................ 2,047
79,000 Fuji Photo Film Ltd............................... 2,280
131,000 Japan Vilene Co., Ltd............................. 826
37,000 Nintendo Corp., Ltd............................... 2,813
278,000 Nissan Motor Co................................... 2,135
71,000 Sankyo Co., Ltd................................... 1,595
37,000 Shimamura Co., Ltd................................ 1,430
230,000 Suzuki Motor Co., Ltd............................. 2,562
95,000 Yamanouchi Pharmaceutical Co...................... 2,042
----------
17,730
----------
ELECTRICAL & ELECTRONICS (18.4%)
70,000 CMK............................................... 997
344,000 Hitachi Ltd....................................... 3,465
187,000 Matsushita Electric Industries Ltd................ 3,043
85,000 Mitsumi Electric Co., Ltd......................... 2,050
294,000 NEC Corp.......................................... 3,588
28,000 Sony Corp......................................... 1,679
235,000 Stanley Electric Co............................... 1,411
40,000 TDK Corp.......................................... 2,042
464,000 Toshiba Corp...................................... 3,636
----------
21,911
----------
FINANCE (6.4%)
180,000 Daiwa Securities Co., Ltd......................... 2,754
77,000 Hitachi Credit Corp............................... 1,395
50,000 Nichido Fire & Marine Insurance Co., Ltd.......... 402
131,000 Nomura Securities Co.............................. 2,855
43,000 Sumitomo Corp. Leasing Ltd........................ 221
----------
7,627
----------
MATERIALS (7.4%)
171,000 Asahi Tec Corp.................................... 1,136
298,000 Daicel Chemical Industry Ltd...................... 1,694
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------
226,000 Kaneka Corp....................................... $ 1,425
60,000 Kansei Corp....................................... 486
128,000 Okura Industrial Co., Ltd......................... 874
155,000 Sanwa Shutter..................................... 1,124
142,000 Sekisui Chemical Co............................... 2,091
----------
8,830
----------
MULTI-INDUSTRY (1.5%)
40,100 FamilyMart........................................ 1,810
----------
SERVICES (10.2%)
82,000 Daibiru Corp...................................... 930
190,000 Inabata & Co...................................... 1,343
117,000 Keihanshin Real Estate............................ 896
146,000 Mitsubishi Estate Co., Ltd........................ 1,824
100,000 Nippon Konpo Unyu Soko............................ 852
269 Nippon Telegraph & Telephone Corp................. 2,175
32,000 Nishio Rent All Co................................ 738
39,000 Sangetsu Co., Ltd................................. 982
35,000 Secom Co., Ltd.................................... 2,434
----------
12,174
----------
TOTAL COMMON STOCKS (Cost $105,078)........................... 107,226
----------
<CAPTION>
FACE
AMOUNT
(000)
- ----------
<C> <S> <C>
SHORT-TERM INVESTMENT (7.2%)
REPURCHASE AGREEMENT (7.2%)
$ 8,601 The Chase Manhattan Bank, N.A., 5.35%, dated
12/29/95, due 1/02/96, to be repurchased at
$8,606, collateralized by $5,665 United States
Treasury Bonds, 11.75%, due 11/15/14, valued at
$8,774 (Cost $8,601)............................ 8,601
----------
FOREIGN CURRENCY (0.0%)
JPY2,734 Japanese Yen (Cost $26)........................... 26
----------
TOTAL INVESTMENTS (97.1%) (Cost $113,705)..................... 115,853
----------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (3.1%)
Net Unrealized Gain on Forward Foreign Currency $ 3,571
Exchange Contracts.............................
Receivable for Portfolio Shares Sold............ 67
Dividends Receivable............................ 20
Interest Receivable............................. 4
Other........................................... 4 3,666
----------
LIABILITIES (-0.2%)
Investment Advisory Fees Payable................ (165)
Administrative Fees Payable..................... (15)
Custodian Fees Payable.......................... (12)
Bank Overdraft.................................. (6)
Other Liabilities............................... (43) (241)
---------- ----------
NET ASSETS (100%)............................................. $ 119,278
----------
----------
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 12,868,920 outstanding $.001 par value shares
(authorized 500,000,000 shares)............................. $9.27
----------
----------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Japanese Equity Portfolio
53
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE JAPANESE EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of forward foreign currency exchange contracts open at
December 31, 1995, the Portfolio is obligated to deliver foreign currency in
exchange for U.S. dollars as indicated below:
<TABLE>
<CAPTION>
IN NET
CURRENCY EXCHANGE UNREALIZED
TO DELIVER VALUE SETTLEMENT FOR VALUE GAIN
(000) (000) DATE (000) (000) (000)
- ------------- --------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
JPY 1,649,900 $ 16,099 2/26/96 U.S.$17,500 $ 17,500 $ 1,401
JPY 2,064,876 20,162 2/29/96 U.S.$21,300 21,300 1,138
JPY 2,522,843 24,716 3/25/96 U.S.$25,500 25,500 784
JPY 1,350,000 13,332 5/22/96 U.S.$13,580 13,580 248
--------- --------- -----------
$ 74,309 $ 77,880 $ 3,571
--------- --------- -----------
--------- --------- -----------
</TABLE>
- ------------------------------------------------------------
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Japanese Equity Portfolio
54
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE LATIN AMERICAN PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------
COMMON STOCKS (62.9%)
ARGENTINA (10.3%)
4,030 Banco de Galicia Y Buenos Aires ADR............... $ 83
144,371 Banco del Suquia, Class B......................... 195
3,473 Banco Frances ADS................................. 93
#19,575 Capex S.A. ADR.................................... 286
8,659 Quilmes Industrial S.A............................ 135
3,950 Telecom Argentina S.A. ADR........................ 188
22,215 Telefonica de Argentina S.A. ADR.................. 606
-------
1,586
-------
BRAZIL (20.2%)
19,488,000 Cia Acos Especiais Itabira........................ 92
+#13,445 Cia Brasileira ADR................................ 134
#1,224 Cia Energetica de Minas Gerais ADR................ 27
#6,842 Cia Energetica de Minas Gerais GDR................ 151
2,295,000 Eletrobras........................................ 621
#27,650 Eletrobras ADR.................................... 375
1,400 Electrobras ADR, Class B.......................... 19
+#3,930 Lojas Americanas S.A. ADR......................... 33
7,240,000 Refrigeracao Parana S.A........................... 13
#6,845 Rhodia-Ster ADS................................... 62
515,000 Servicos de Eletricidade.......................... 165
3,590,000 Telebras.......................................... 139
#25,320 Telebras ADR...................................... 1,200
538,500 Telecomunicacoes de Sao Paulo..................... 78
-------
3,109
-------
COLOMBIA (0.5%)
#15,330 Banco de Colombia GDR............................. 80
-------
MEXICO (31.9%)
79,160 Apasco S.A., Class A.............................. 325
213,980 Banacci, Class B.................................. 359
52,329 Banacci, Class L.................................. 78
+23,950 Cemex CPO ADR..................................... 158
149,248 Cemex S.A., Class A............................... 493
+143,000 Cifra S.A. de C.V., Class B....................... 149
24,160 Empresas ICA S.A. ADR............................. 248
299,100 FEMSA, Class B.................................... 674
+#7,210 Grupo Carso S.A. ADR.............................. 77
#118,585 Grupo Financiero Bancomer ADR..................... 689
13,270 Alfa S.A. de C.V., Class A........................ 171
15,070 Grupo Televisa S.A. ADR........................... 339
11,870 Kimberly Clark de Mexico S.A. de C.V., Class A.... 180
8,185 Panamerican Beverages, Inc., Class A.............. 262
21,945 Telefonos de Mexico S.A. ADR, Class L............. 699
-------
4,901
-------
TOTAL COMMON STOCKS (Cost $9,082).................................... 9,676
-------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------
PREFERRED (NON-VOTING STOCKS) (32.7%)
BRAZIL (32.7%)
65,136,249 Banco Bradesco S.A................................ $ 570
+19,913,000 Banco do Brasil................................... 225
**11,847,000 Banco Nacional S.A................................ 25
1,892,173 Brahma............................................ 779
+148,500 Centrais Eletricas de Santa Catarina, Class B..... 72
+4,811,000 Cia Energetica de Minas Gerais.................... 107
7,899,000 Cia Paulista de Forca E Luz....................... 211
3,566,000 Continental 2001.................................. 44
479,000 Coteminas......................................... 160
+189,211 Dixie Toga S.A.................................... 165
1,664,000 Eletrobras, Class B............................... 450
1,126,400 Itaubanco......................................... 314
151,000 Itausa Investimentos Itau S.A..................... 82
8,180,000 Lojas Renner...................................... 219
63,000 Multibras S.A..................................... 47
3,280,000 Petrobras......................................... 280
38,295,000 Refrigeracao Parana S.A........................... 76
15,109,000 Telebras.......................................... 728
551,000 Telecomunicacoes de Sao Paulo..................... 81
1,518,000 Vale Do Rio Doce.................................. 250
329,000 WEG S.A........................................... 135
-------
TOTAL PREFERRED (NON-VOTING STOCKS) (Cost $5,375).................... 5,020
-------
<CAPTION>
FACE
AMOUNT
(000)
- ----------------
<C> <S> <C>
FIXED INCOME SECURITIES (4.8%)
BONDS (2.1%)
COLOMBIA (2.1%)
$ #430 Banco de Colombia 5.20%, 2/01/99
(Cost $380)..................................... 327
-------
CONVERTIBLE DEBENTURES (2.7%)
VENEZUELA (2.7%)
750 Republic of Venezuela Debt Conversion Bonds,
Series DL, (Floating Rate), 6.563%, 12/18/07
(Cost $394)..................................... 413
-------
TOTAL FIXED INCOME SECURITIES (Cost $774)............................ 740
-------
<CAPTION>
NO. OF
RIGHTS
- ----------------
<C> <S> <C>
RIGHTS (0.0%)
BRAZIL (0.0%)
+**2,058,932 Banco Bradesco, expiring 1/31/96
(Cost $0)....................................... 3
-------
TOTAL FOREIGN SECURITIES (100.4%) (Cost $15,231)..................... 15,439
-------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Latin American Portfolio
58
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE LATIN AMERICAN PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------
FOREIGN CURRENCY (0.2%)
ARP 7 Argentine Peso........................................ $ 7
BRC 4 Brazilian Real........................................ 4
MXP 155 Mexican Peso.......................................... 20
PSS 2 Peruvian New Sol...................................... 1
-------
TOTAL FOREIGN CURRENCY (Cost $32).................................... 32
-------
TOTAL INVESTMENTS (100.6%) (Cost $15,263)............................ 15,471
-------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (4.1%)
Receivable for Investments Sold........ $ 581
Dividends Receivable................... 42
Interest Receivable.................... 11
Other.................................. 1 635
---------
LIABILITIES (-4.7%)
Bank Overdraft......................... (415)
Payable for Portfolio Shares
Redeemed.............................. (237)
Custodian Fees Payable................. (29)
Investment Advisory Fees Payable....... (7)
Sub-Administrative Fees Payable........ (5)
Administrative Fees Payable............ (4)
Other Liabilities...................... (33) (730)
--------- ---------
NET ASSETS (100%)................................... $ 15,376
---------
---------
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 1,697,153 outstanding $.001 par
value shares (authorized 500,000,000 shares)...... $9.06
---------
---------
</TABLE>
- ------------------------------------------------
+ -- Non-income producing security
** -- Security is valued at fair value -- See Note A-1
# -- 144A Security -- Certain conditions for public sale may exist.
ADR -- American Depositary Receipt
ADS -- American Depositary Shares
GDR -- Global Depositary Receipt
CPO -- Certificate of Participation
Floating Rate -- Interest rate changes on these instruments are based on changes
in a designated base rate. The rates shown are those in effect on December 31,
1995.
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- -----------------------------------------------------------------
Capital Equipment...................... $ 344 2.3%
Consumer Goods......................... 2,512 16.3
Energy................................. 2,881 18.7
Finance................................ 3,124 20.3
Government............................. 413 2.7
Materials.............................. 1,719 11.2
Multi-Industry......................... 389 2.5
Services............................... 4,057 26.4
--------- -------
$ 15,439 100.4%
--------- -------
--------- -------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Latin American Portfolio
59
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE AGGRESSIVE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (101.2%)
CAPITAL GOODS/CONSTRUCTION (16.0%)
AEROSPACE & DEFENSE (9.2%)
8,900 General Dynamics Corp............................. $ 526
10,200 McDonnell Douglas Corp............................ 938
12,300 United Technologies Corp.......................... 1,167
----------
2,631
----------
BUILDING & CONSTRUCTION (2.8%)
18,400 American Standard Co.............................. 515
19,900 AMRE, Inc......................................... 291
----------
806
----------
MACHINERY (4.0%)
16,300 Sundstrand Corp................................... 1,147
----------
TOTAL CAPITAL GOODS/CONSTRUCTION............................ 4,584
----------
CONSUMER CYCLICAL (14.4%)
ENTERTAINMENT & LEISURE (2.4%)
4,700 Eastman Kodak Co.................................. 315
6,400 Walt Disney Co.................................... 378
----------
693
----------
FOOD SERVICE & LODGING (5.0%)
+17,300 HFS, Inc.......................................... 1,414
----------
PUBLISHING (1.8%)
42,300 K-III Communications, Corp........................ 513
----------
RETAIL-GENERAL (5.2%)
+20,700 AutoZone, Inc..................................... 598
+25,200 General Nutrition Cos., Inc....................... 580
6,700 Home Depot, Inc................................... 321
----------
1,499
----------
TOTAL CONSUMER CYCLICAL..................................... 4,119
----------
CONSUMER STAPLES (30.8%)
BEVERAGES & TOBACCO (2.9%)
15,000 Coca Cola Enterprises, Inc........................ 401
13,800 RJR Nabisco Holdings Corp......................... 426
----------
827
----------
CIGARETTES (19.8%)
59,400 Philip Morris Cos., Inc........................... 5,376
8,400 UST, Inc.......................................... 280
----------
5,656
----------
DRUGS (5.0%)
16,200 Pharmacia & Upjohn, Inc........................... 628
14,600 Schering-Plough Corp.............................. 799
----------
1,427
----------
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
FOOD (3.1%)
12,000 Ralston Purina Group.............................. $ 749
2,700 Wrigley (William) Jr. Co.......................... 142
----------
891
----------
TOTAL CONSUMER STAPLES...................................... 8,801
----------
DIVERSIFIED (4.1%)
14,900 Loews Corp........................................ 1,168
----------
FINANCE (26.0%)
BANKING (15.0%)
6,700 Chase Manhattan Corp.............................. 406
9,300 First Interstate Bancorp.......................... 1,269
12,100 Wells Fargo & Co.................................. 2,614
----------
4,289
----------
FINANCIAL SERVICES (11.0%)
31,800 American Express Co............................... 1,316
6,000 Dean Witter Discover & Co......................... 282
8,600 Federal National Mortgage Association............. 1,067
7,000 Student Loan Marketing Association................ 461
----------
3,126
----------
TOTAL FINANCE............................................... 7,415
----------
SERVICES (1.4%)
TRANSPORTATION (1.4%)
+26,600 Canadian National Railway......................... 399
----------
TECHNOLOGY (8.5%)
COMPUTERS (0.8%)
+3,000 Intuit, Inc....................................... 234
----------
ELECTRONICS (3.7%)
+9,600 Applied Materials, Inc............................ 378
4,500 Intel Corp........................................ 255
9,300 Watkins-Johnson Co................................ 407
----------
1,040
----------
OFFICE EQUIPMENT (4.0%)
+5,500 Digital Equipment Corp............................ 352
8,500 International Business Machines Corp.............. 780
----------
1,132
----------
TOTAL TECHNOLOGY............................................ 2,406
----------
TOTAL COMMON STOCKS (Cost $27,097)............................ 28,892
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
- ----------
<C> <S> <C>
SHORT-TERM INVESTMENT (5.6%)
U.S. GOVERNMENT AGENCY OBLIGATION (5.6%)
$ 1,600 Federal National Mortgage Association Discount
Note 5.50%, 1/22/96
(Cost $1,595)................................... 1,595
----------
TOTAL INVESTMENTS (106.8%) (Cost $28,692)..................... 30,487
----------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Aggressive Equity Portfolio
62
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE AGGRESSIVE EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- ------------------------------------------------------------
OTHER ASSETS (12.0%)
Receivable for Securities Sold Short............ $ 2,707
Receivable for Investments Sold................. 448
Receivable for Portfolio Shares Sold............ 210
Dividends Receivable............................ 62
Other........................................... 1 $ 3,428
----------
LIABILITIES (-18.8%)
Securities Sold Short, at Value (Proceeds
$2,707)........................................ (2,642)
Bank Overdraft.................................. (1,797)
Payable for Investments Purchased............... (873)
Investment Advisory Fees Payable................ (22)
Administrative Fees Payable..................... (4)
Custodian Fees Payable.......................... (3)
Other Liabilities............................... (26) (5,367 )
---------- ----------
NET ASSETS (100%)............................................. $ 28,548
----------
----------
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 2,345,287 outstanding $.001 par value shares
(authorized 500,000,000 shares)............................. $12.17
----------
----------
</TABLE>
- ------------------------------------------------------------
<TABLE>
<S> <C> <C>
+ -- Non-income producing security
</TABLE>
Interest rate disclosed for U.S. Government Agency discount note
represents effective yields at December 31, 1995.
- ------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
SECURITIES SOLD SHORT (NOTE A-9)
<C> <S> <C>
26,600 Canadian National Railway.................. $ 399
5,500 Digital Equipment Corp..................... 352
3,000 Intuit, Inc................................ 234
16,200 Pharmacia & Upjohn, Inc.................... 628
12,000 Ralston Purina Group....................... 749
8,400 UST, Inc................................... 280
---------
(Total Proceeds $2,707).................... $ 2,642
---------
---------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Aggressive Equity Portfolio
63
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE EMERGING GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
------------------------------------------------------------
COMMON STOCKS (97.3%)
CONSUMER-CYCLICAL (19.4%)
FOOD SERVICE & LODGING (6.8%)
+37,700 Cheesecake Factory, Inc........................... $ 801
+45,000 HFS, Inc.......................................... 3,679
70,000 Promus Hotel Corp................................. 1,558
+111,600 Sonic Corp........................................ 2,064
----------
8,102
----------
PRINTING & PUBLISHING (3.3%)
80,000 Lee Enterprises, Inc.............................. 1,840
+27,000 Scholastic Corp................................... 2,099
----------
3,939
----------
RETAIL-GENERAL (9.3%)
+70,000 Bed, Bath & Beyond, Inc........................... 2,704
+35,000 Central Tractor Farm & Country, Inc............... 359
+120,000 General Nutrition Cos., Inc....................... 2,760
+30,000 Kohl's Corp....................................... 1,575
+75,000 OfficeMax, Inc.................................... 1,678
+88,000 Sunglass Hut International, Inc................... 2,068
----------
11,144
----------
TOTAL CONSUMER-CYCLICAL..................................... 23,185
----------
CONSUMER-STAPLES (29.5%)
DRUGS (6.1%)
+60,000 Forest Laboratories, Inc.......................... 2,715
28,000 Genzyme Corp. -- General Division................. 1,736
+9,800 Immucor, Inc...................................... 91
+55,000 Scherer (R.P.) Corp............................... 2,702
----------
7,244
----------
HEALTH CARE SUPPLIES & SERVICES (19.5%)
47,000 Arrow International, Inc.......................... 1,868
55,000 Ballard Medical Products.......................... 983
+120,000 Biomet, Inc....................................... 2,130
+50,000 Haemonetics Corp.................................. 887
+85,000 Health Management Systems, Inc.................... 3,273
+115,000 Healthsource, Inc................................. 4,140
+130,000 HEALTHSOUTH Rehabilitation Corp................... 3,786
+6,400 Mariner Health Group, Inc......................... 107
+75,000 Research Medical, Inc............................. 2,025
+40,000 Vencor, Inc....................................... 1,300
+112,500 Vivra, Inc........................................ 2,827
----------
23,326
----------
HOSPITAL MANAGEMENT (1.5%)
36,000 American Oncology Resources, Inc.................. 1,750
----------
MISCELLANEOUS (2.4%)
+60,000 IDEXX Laboratories, Inc........................... 2,820
----------
TOTAL CONSUMER-STAPLES...................................... 35,140
----------
FINANCE (3.3%)
INSURANCE (3.3%)
50,000 Mutual Risk Management Ltd........................ 2,288
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
------------------------------------------------------------
45,000 NAC Re Corp....................................... $ 1,620
----------
TOTAL FINANCE............................................... 3,908
----------
MATERIALS (2.9%)
MISCELLANEOUS (2.9%)
+75,000 Viking Office Products, Inc....................... 3,487
----------
SERVICES (14.7%)
BUSINESS SERVICES (3.4%)
60,000 First Data Corp................................... 4,012
3,000 Sitel Corp........................................ 92
----------
4,104
----------
PROFESSIONAL SERVICES (11.2%)
+19,900 American Business Information, Inc................ 386
+44,900 American Medical Response, Inc.................... 1,459
75,000 Cintas Corp....................................... 3,338
60,000 CRA Managed Care, Inc............................. 1,313
+115,000 CUC International, Inc............................ 3,924
115,000 G & K Services, Inc., Class A..................... 2,932
----------
13,352
----------
TRANSPORTATION (0.1%)
4,500 Midwest Express Holdings, Inc..................... 125
----------
TOTAL SERVICES.............................................. 17,581
----------
TECHNOLOGY (27.5%)
ELECTRONICS (13.7%)
+60,000 Electroglas, Inc.................................. 1,470
+39,900 Fusion Systems Corp............................... 1,117
+50,100 Level One Communications, Inc..................... 902
90,000 Linear Technology, Inc............................ 3,532
+70,000 Maxim Integrated Products, Inc.................... 2,678
+35,000 Microchip Technology, Inc......................... 1,278
70,000 Molex, Inc., Class A.............................. 2,144
+110,000 Xilinx, Inc....................................... 3,327
----------
16,448
----------
OFFICE EQUIPMENT (12.9%)
8,600 Adobe Systems, Inc................................ 533
+75,000 BISYS Group, Inc.................................. 2,306
+75,000 Concord EFS Corp.................................. 3,094
+134,850 Informix Corp..................................... 4,045
+52,600 Progress Software Corp............................ 1,946
+125,000 SunGard Data Systems, Inc......................... 3,469
----------
15,393
----------
TELECOMMUNICATIONS (0.9%)
+50,000 Mobile Telecommunications Technologies Corp....... 1,063
----------
TOTAL TECHNOLOGY............................................ 32,904
----------
TOTAL COMMON STOCKS (Cost $63,267)............................ 116,205
----------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Emerging Growth Portfolio
66
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE EMERGING GROWTH PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
------------------------------------------------------------
<C> <S> <C>
SHORT-TERM INVESTMENT (2.6%)
REPURCHASE AGREEMENT (2.6%)
$ 3,053 The Chase Manhattan Bank, N.A., 5.35%, dated
12/29/95, due 1/02/96, to be repurchased at
$3,055, collateralized by $2,570 United States
Treasury Bonds, 7.625%, due 11/15/22, valued at
$3,113 (Cost $3,053)............................ $ 3,053
----------
TOTAL INVESTMENTS (99.9%) (Cost $66,320)...................... 119,258
----------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (0.5%)
Cash............................................ $ 1
Receivable for Portfolio Shares Sold............ 318
Receivable for Investments Sold................. 190
Dividends Receivable............................ 27
Interest Receivable............................. 1
Other........................................... 10 547
-----
LIABILITIES (-0.4%)
Investment Advisory Fees Payable................ (332)
Payable for Portfolio Shares Redeemed........... (47)
Administrative Fees Payable..................... (16)
Custodian Fees Payable.......................... (4)
Other Liabilities............................... (28) (427)
----- ----------
NET ASSETS (100%)............................................. $ 119,378
----------
----------
</TABLE>
<TABLE>
<C> <S> <C>
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 5,554,674 outstanding $.001 par value shares
(authorized 500,000,000 shares)............................. $21.49
----------
----------
</TABLE>
- ------------------------------------------------------------
<TABLE>
<S> <C> <C>
+ -- Non-income producing security
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Emerging Growth Portfolio
67
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE EQUITY GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------
COMMON STOCKS (94.2%)
CAPITAL GOODS/CONSTRUCTION (8.5%)
AEROSPACE & DEFENSE (6.6%)
17,500 Boeing Co......................................... $ 1,371
15,100 General Dynamics Corp............................. 893
+6,500 Litton Industries, Inc............................ 289
10,900 Lockheed Martin Corp.............................. 861
35,500 McDonnell Douglas Corp............................ 3,266
38,700 United Technologies Corp.......................... 3,672
----------
10,352
----------
MACHINERY (1.9%)
43,000 Sundstrand Corp................................... 3,026
----------
TOTAL CAPITAL GOODS/CONSTRUCTION............................ 13,378
----------
CONSUMER-CYCLICAL (19.0%)
AUTOMOTIVE (1.0%)
34,300 Goodyear Tire & Rubber Co......................... 1,556
----------
BROADCAST-RADIO & TELEVISION (2.3%)
+40,000 Infinity Broadcasting, Class A.................... 1,490
+52,400 New World Communications Group, Inc............... 917
+26,797 Viacom, Inc., Class B............................. 1,269
----------
3,676
----------
ENTERTAINMENT & LEISURE (1.3%)
+24,300 AMC Entertainment, Inc............................ 568
26,000 Walt Disney Co.................................... 1,534
----------
2,102
----------
FOOD SERVICE & LODGING (3.0%)
+28,000 Boston Chicken, Inc............................... 899
+34,300 HFS, Inc.......................................... 2,804
39,200 La Quinta Inns, Inc............................... 1,073
----------
4,776
----------
GAMING & LODGING (0.1%)
+10,100 Trump Hotels & Casino Resort...................... 217
----------
HOUSEHOLD FURNISHINGS & APPLIANCES (2.0%)
+78,700 American Standard Co.............................. 2,203
59,700 AMRE, Inc......................................... 873
----------
3,076
----------
LEISURE RELATED (1.3%)
22,400 Eastman Kodak Co.................................. 1,501
+23,500 Toy Biz, Inc...................................... 511
----------
2,012
----------
PUBLISHING (3.1%)
29,800 Gannett Co., Inc.................................. 1,829
+175,900 K-III Communications, Corp........................ 2,133
31,300 New York Times Co., Class A....................... 927
----------
4,889
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------
RETAIL-GENERAL (4.9%)
+60,700 AutoZone, Inc..................................... $ 1,753
+84,200 General Nutrition Cos., Inc....................... 1,937
32,000 Harcourt General, Inc............................. 1,340
31,300 Home Depot, Inc................................... 1,498
+17,600 PetSmart, Inc..................................... 546
14,100 Tandy Corp........................................ 585
----------
7,659
----------
TOTAL CONSUMER-CYCLICAL..................................... 29,963
----------
CONSUMER-STAPLES (20.9%)
APPAREL & TEXTILES (0.5%)
7,400 NIKE, Inc., Class B............................... 515
11,200 Reebok International Ltd.......................... 316
----------
831
----------
BEVERAGES & TOBACCO (11.7%)
68,600 Coca Cola Enterprises, Inc........................ 1,835
161,500 Philip Morris Cos., Inc........................... 14,616
66,600 RJR Nabisco Holdings Corp......................... 2,056
----------
18,507
----------
DRUGS (3.3%)
15,500 American Home Products Corp....................... 1,504
28,900 Pfizer, Inc....................................... 1,821
35,700 Schering-Plough Corp.............................. 1,955
----------
5,280
----------
FOOD (2.2%)
23,800 Interstate Bakeries Corp.......................... 532
12,600 Kellogg Co........................................ 973
9,100 Ralston Purina Group.............................. 568
25,400 Wrigley (William) Jr. Co.......................... 1,334
----------
3,407
----------
HEALTH CARE SUPPLIES & SERVICES (3.2%)
17,800 Aetna Life & Casualty Co.......................... 1,232
33,000 Columbia/HCA Healthcare Corp...................... 1,675
13,600 United Healthcare Corp............................ 891
26,700 US Healthcare, Inc................................ 1,242
----------
5,040
----------
TOTAL CONSUMER-STAPLES...................................... 33,065
----------
DIVERSIFIED (3.4%)
48,900 Loews Corp........................................ 3,833
23,400 Textron, Inc...................................... 1,580
----------
TOTAL DIVERSIFIED........................................... 5,413
----------
FINANCE (23.1%)
BANKING (10.1%)
22,100 Chase Manhattan Corp.............................. 1,340
32,000 Citicorp.......................................... 2,152
28,300 First Interstate Bancorp.......................... 3,863
23,800 Morgan (J.P.) & Co., Inc.......................... 1,910
31,200 Wells Fargo & Co.................................. 6,739
----------
16,004
----------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Equity Growth Portfolio
70
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE EQUITY GROWTH PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
FINANCIAL SERVICES (10.6%)
110,600 American Express Co............................... $ 4,576
12,400 CIGNA Corp........................................ 1,280
40,000 Dean Witter Discover & Co......................... 1,880
22,800 Federal Home Loan Mortgage Corp................... 1,904
19,400 Federal National Mortgage Association............. 2,408
26,000 Franklin Resources, Inc........................... 1,310
29,900 Household International, Inc...................... 1,768
24,000 Student Loan Marketing Association................ 1,581
----------
16,707
----------
INSURANCE (2.4%)
31,300 Ace Ltd........................................... 1,244
38,900 Exel Ltd.......................................... 2,373
+9,500 GCR Holdings, Ltd................................. 211
----------
3,828
----------
TOTAL FINANCE............................................... 36,539
----------
MATERIALS (2.9%)
CHEMICALS (2.9%)
26,400 Hercules, Inc..................................... 1,488
18,800 IMC Global, Inc................................... 769
9,100 Monsanto Co....................................... 1,115
15,600 Olin Corp......................................... 1,158
----------
TOTAL MATERIALS............................................. 4,530
----------
SERVICES (3.0%)
BUSINESS SERVICES (1.0%)
22,600 First Data Corp................................... 1,511
----------
PROFESSIONAL SERVICES (1.1%)
+15,200 Bell & Howell Holding Co.......................... 426
+38,750 CUC International, Inc............................ 1,322
----------
1,748
----------
TRANSPORTATION (0.9%)
+10,800 AMR Corp.......................................... 802
+51,300 USAir Group, Inc.................................. 680
----------
1,482
----------
TOTAL SERVICES.............................................. 4,741
----------
TECHNOLOGY (13.4%)
COMPUTERS (3.8%)
+12,800 Cisco Systems, Inc................................ 955
18,900 Hewlett Packard Co................................ 1,583
26,700 International Business Machines Corp.............. 2,450
+23,200 Seagate Technology, Inc........................... 1,102
----------
6,090
----------
ELECTRONICS (4.6%)
+40,600 Applied Materials, Inc............................ 1,599
19,800 Intel Corp........................................ 1,124
+28,100 LSI Logic Corp.................................... 920
19,300 Motorola, Inc..................................... 1,100
15,400 Texas Instruments, Inc............................ 797
40,900 Watkins-Johnson Co................................ 1,789
----------
7,329
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------
OFFICE EQUIPMENT (0.6%)
26,100 Reynolds & Reynolds, Class A...................... $ 1,015
----------
SOFTWARE SERVICES (2.0%)
+18,900 Microsoft Corp.................................... 1,658
+33,900 Oracle System Corp................................ 1,437
----------
3,095
----------
TELECOMMUNICATIONS (2.4%)
+26,400 AirTouch Communications, Inc...................... 746
23,700 American Telephone & Telegraph Corp............... 1,535
56,400 MCI Communications Corp........................... 1,473
----------
3,754
----------
TOTAL TECHNOLOGY............................................ 21,283
----------
TOTAL COMMON STOCKS (Cost $132,472)........................... 148,912
----------
<CAPTION>
FACE
AMOUNT
(000)
- ----------
<C> <S> <C>
SHORT-TERM INVESTMENT (6.2%)
REPURCHASE AGREEMENT (6.2%)
$ 9,800 Goldman Sachs & Co., 5.83%, dated 12/29/95, due
1/02/96, to be repurchased at $9,806,
collateralized by $6,105 United States Treasury
Bonds, 13.875%, due 5/15/11, valued at $10,006
(Cost $9,800)................................... 9,800
----------
TOTAL INVESTMENTS (100.4%) (Cost $142,272).................... 158,712
----------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (2.3%)
Receivable for Investments Sold................. $ 3,215
Dividends Receivable............................ 353
Receivable for Portfolio Shares Sold............ 65
Interest Receivable............................. 5
Other........................................... 9 3,647
----------
LIABILITIES (-2.7%)
Payable for Investments Purchased............... (2,782)
Payable for Portfolio Shares Redeemed........... (1,176)
Investment Advisory Fees Payable................ (224)
Administrative Fees Payable..................... (22)
Custodian Fees Payable.......................... (7)
Other Liabilities............................... (36) (4,247)
---------- ----------
NET ASSETS (100%)............................................. $ 158,112
----------
----------
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 11,182,044 outstanding $.001 par value shares
(authorized 500,000,000 shares)............................. $14.14
----------
----------
</TABLE>
- ------------------------------------------------------------
+ -- Non-income producing security
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Equity Growth Portfolio
71
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE SMALL CAP VALUE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (95.7%)
AEROSPACE (2.2%)
27,000 AAR Corp.......................................... $ 594
16,000 Thiokol Corp...................................... 542
300 United Industrial Corp............................ 2
----------
1,138
----------
BANKING (9.5%)
17,450 First Security Corp. (Delaware)................... 672
24,000 Greenpoint Financial Corp......................... 642
15,600 Onbancorp, Inc.................................... 521
25,000 Peoples Heritage Financial Group, Inc............. 569
16,000 Standard Federal Bank............................. 630
29,000 Trustmark Corp.................................... 660
20,000 Union Planters Corp............................... 638
21,000 Washington Mutual, Inc............................ 606
----------
4,938
----------
BUILDING (1.9%)
13,300 Ameron, Inc. (Delaware)........................... 500
38,800 Gilbert Associates, Inc., Class A................. 485
----------
985
----------
CAPITAL GOODS (4.2%)
21,403 Binks Manufacturing Co............................ 503
33,200 Cascade Corp...................................... 465
21,600 Starrett (L.S.) Co., Class A...................... 559
12,200 Tecumseh Products Co., Class A.................... 631
----------
2,158
----------
CHEMICALS (4.8%)
33,792 Aceto Corp........................................ 541
23,400 Dexter Corp....................................... 553
19,400 Learonal, Inc..................................... 446
29,800 Quaker Chemical Corp.............................. 402
18,000 Witco Corp........................................ 527
----------
2,469
----------
COMMUNICATIONS (1.1%)
30,200 Comsat Corp....................................... 562
----------
CONSUMER-DURABLES (3.9%)
26,200 Arvin Industries, Inc............................. 432
30,298 Knape & Vogt Manufacturing Co..................... 526
31,300 Oneida Ltd........................................ 552
25,100 Smith (A.O.) Corp., Class B....................... 521
----------
2,031
----------
CONSUMER-RETAIL (4.1%)
31,800 CPI Corp.......................................... 509
25,500 Deb Shops, Inc.................................... 88
25,700 Guilford Mills, Inc............................... 523
23,000 Ross Stores, Inc. 440
14,100 Springs Industries, Inc., Class A................. 583
----------
2,143
----------
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
CONSUMER-STAPLES (4.3%)
15,246 Block Drug Co., Inc., Class A..................... $ 530
30,400 Coors (Adolph), Inc., Class B..................... 673
27,900 International Multifoods Corp..................... 561
26,400 Nash Finch Co..................................... 482
----------
2,246
----------
ENERGY (3.3%)
24,600 Ashland Coal, Inc................................. 526
21,000 Diamond Shamrock, Inc............................. 543
25,500 Ultramar Corp..................................... 657
----------
1,726
----------
FINANCIAL-DIVERSIFIED (4.6%)
11,900 Finova Group, Inc................................. 574
10,100 GATX Corp......................................... 491
35,000 Manufactured Home Communities, Inc. REIT.......... 613
28,000 South West Property Trust REIT.................... 378
14,000 Wellsford Residential Property Trust REIT......... 322
----------
2,378
----------
HEALTH CARE (6.7%)
30,000 Analogic Corp..................................... 555
14,500 Beckman Instruments, Inc.......................... 513
26,400 Bergen Brunswig Corp., Class A.................... 657
35,500 Bindley Western Industries........................ 604
49,700 Kinetic Concepts, Inc............................. 596
26,000 United Wisconsin Services, Inc.................... 572
----------
3,497
----------
INDUSTRIAL (5.8%)
17,200 American Filtrona Corp............................ 576
13,400 Barnes Group, Inc................................. 482
50,700 GenCorp, Inc...................................... 621
44,500 Kaman Corp., Class A.............................. 495
34,900 Zero Corp. (Delaware)............................. 620
10,300 Zurn Industries, Inc.............................. 220
----------
3,014
----------
INSURANCE (5.8%)
16,200 Argonaut Group, Inc............................... 526
25,000 Enhance Financial Services Group, Inc............. 666
19,500 Provident Companies, Inc.......................... 661
15,900 Selective Insurance Group, Inc.................... 564
19,950 USLife Corp....................................... 596
----------
3,013
----------
METALS (2.1%)
35,700 Birmingham Steel Corp............................. 531
14,100 Cleveland-Cliffs Iron Co.......................... 578
----------
1,109
----------
PAPER & PACKAGING (2.8%)
21,500 Ball Corp......................................... 591
13,900 Potlatch Corp..................................... 556
25,500 Sealright Co., Inc................................ 284
----------
1,431
----------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Small Cap Value Equity Portfolio
75
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE SMALL CAP VALUE EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
SERVICES (11.0%)
23,200 ABM Industries, Inc............................... $ 644
21,200 Angelica Corp..................................... 435
27,000 Bowne & Co........................................ 540
30,700 Cross (A.T.) Co., Class A......................... 464
38,000 Jackpot Enterprises, Inc.......................... 442
18,400 National Service Industries, Inc.................. 596
20,900 New England Business Services, Inc................ 455
24,400 Ogden Corp........................................ 521
55,400 Piccadilly Cafeterias, Inc........................ 526
41,500 Russ Berrie & Co., Inc............................ 524
25,000 Sbarro, Inc....................................... 537
----------
5,684
----------
TECHNOLOGY (7.7%)
36,000 Augat, Inc........................................ 616
48,000 Core Industries, Inc.............................. 618
21,800 Cubic Corp........................................ 621
33,700 Gerber Scientific, Inc............................ 548
15,900 MTS Systems Corp.................................. 525
30,500 National Computer Systems, Inc.................... 576
36,000 Scitex Ltd........................................ 490
----------
3,994
----------
TRANSPORTATION (2.5%)
22,000 Airborne Freight Corp............................. 586
19,800 Overseas Shipholding Group, Inc................... 376
28,000 SkyWest, Inc...................................... 360
----------
1,322
----------
UTILITIES (7.4%)
19,700 Central Hudson Gas & Electric..................... 608
13,300 Commonwealth Energy Systems Cos................... 595
15,000 Eastern Enterprises............................... 529
25,900 Oneok, Inc........................................ 592
13,700 Orange & Rockland Utilities, Inc.................. 490
13,700 SJW Corp.......................................... 517
28,500 Washington Water Power Co......................... 499
----------
3,830
----------
TOTAL COMMON STOCKS (Cost $44,714)............................ 49,668
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------
SHORT-TERM INVESTMENT (4.1%)
REPURCHASE AGREEMENT (4.1%)
$ 2,127 The Chase Manhattan Bank, N.A., 5.35%, dated
12/29/95, due 1/02/96, to be repurchased at
$2,128, collateralized by $1,800 United States
Treasury Bonds, 7.50%, due 11/15/24, valued at
$2,171 (Cost $2,127)............................ $ 2,127
----------
TOTAL INVESTMENTS (99.8%) (Cost $46,841)...................... 51,795
----------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (0.5%)
Dividends Receivable............................ $ 126
Receivable for Investments Sold................. 121
Interest Receivable............................. 1
Other........................................... 4 252
----------
LIABILITIES (-0.3%)
Investment Advisory Fees Payable................ (91)
Administrative Fees Payable..................... (7)
Custodian Fees Payable.......................... (3)
Payable for Portfolio Shares Redeemed........... (1)
Other Liabilities............................... (26) (128)
---------- ----------
NET ASSETS (100%)............................................. $ 51,919
----------
----------
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 4,357,807 outstanding $.001 par value shares
(authorized 500,000,000 shares)............................. $11.91
----------
----------
</TABLE>
- ------------------------------------------------------------
REIT -- Real Estate Investment Trust
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Small Cap Value Equity Portfolio
76
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE U.S. REAL ESTATE PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (96.0%)
APARTMENT (18.6%)
47,300 Associated Estates Realty Corp. REIT.............. $ 1,017
123,800 Avalon Properties, Inc. REIT...................... 2,662
31,100 Camden Property Trust REIT........................ 742
125,900 Essex Property Trust, Inc. REIT................... 2,424
61,100 Evans Withycombe Residential, Inc. REIT........... 1,314
50,300 Paragon Group, Inc. REIT.......................... 874
9,700 South West Property Trust REIT.................... 131
135,000 Walden Residential Properties, Inc. REIT.......... 2,818
40,700 Wellsford Residential Property Trust REIT......... 936
----------
12,918
----------
LAND (2.5%)
+196,200 Atlantic Gulf Communities Corp.................... 1,324
+69,800 Catellus Development Corp......................... 419
----------
1,743
----------
LODGING/LEISURE (17.8%)
40,000 Felcor Suite Hotels, Inc. REIT.................... 1,110
+220,500 Host Marriot Corp................................. 2,922
+207,500 John Q Hammons Hotels, Inc........................ 1,919
+246,600 Prime Hospitality Corp............................ 2,466
54,200 Red Lion Hotels, Inc.............................. 949
+117,600 Servico, Inc...................................... 1,235
+187,400 ShoLodge, Inc..................................... 1,780
----------
12,381
----------
MANUFACTURED HOME (6.1%)
90,800 Manufactured Home Communities, Inc. REIT.......... 1,589
109,650 ROC Communities, Inc. REIT........................ 2,632
----------
4,221
----------
OFFICE AND INDUSTRIAL (25.9%)
INDUSTRIAL (1.7%)
53,700 First Industrial Realty Trust, Inc. REIT.......... 1,208
----------
OFFICE (7.4%)
101,500 Beacon Properties Corp. REIT...................... 2,335
67,500 Carr Realty Corp. REIT............................ 1,645
6,900 Crescent Real Estate Equities, Inc. REIT.......... 235
106,100 Crocker Realty Trust, Inc. REIT................... 942
----------
5,157
----------
OFFICE AND INDUSTRIAL (16.8%)
257,400 Bedford Property Investors, Inc. REIT............. 1,866
54,600 Duke Realty Investments, Inc. REIT................ 1,713
49,100 Highwoods Properties, Inc. REIT................... 1,387
160,700 Liberty Property Trust REIT....................... 3,335
60,600 Reckson Associates Realty Corp. REIT.............. 1,780
64,000 Spieker Properties, Inc. REIT..................... 1,608
----------
11,689
----------
TOTAL OFFICE AND INDUSTRIAL................................. 18,054
----------
SELF STORAGE (4.7%)
173,000 Public Storage, Inc. REIT......................... 3,287
----------
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
SHOPPING CENTER (20.4%)
FACTORY OUTLET CENTER (1.9%)
58,100 HGI Realty, Inc. REIT............................. $ 1,329
----------
REGIONAL MALL (14.3%)
343,100 Crown American Realty Trust REIT.................. 2,702
235,000 DeBartolo Realty Corp. REIT....................... 3,055
222,900 Glimcher Realty Trust REIT........................ 3,845
13,600 Rouse Co.......................................... 277
3,700 Taubman Centers, Inc. REIT........................ 37
----------
9,916
----------
SHOPPING CENTER (4.2%)
185,500 Alexander Haagen Properties, Inc. REIT............ 2,272
55,700 Burnham Pacific Property Trust REIT............... 536
6,800 Kranzco Realty Trust REIT......................... 100
----------
2,908
----------
TOTAL SHOPPING CENTER....................................... 14,153
----------
TOTAL COMMON STOCKS (Cost $62,861)............................ 66,757
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
- ----------
<C> <S> <C>
SHORT-TERM INVESTMENT (3.3%)
REPURCHASE AGREEMENT (3.3%)
$ 2,315 The Chase Manhattan Bank, N.A., 5.35%, dated
12/29/95, due 1/02/96, to be repurchased at
$2,316, collateralized by $1,510 United States
Treasury Bonds, 10.625%, due 8/15/15, valued at
$2,363 (Cost $2,315)............................ 2,315
----------
TOTAL INVESTMENTS (99.3%) (Cost $65,176)...................... 69,072
----------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (4.7%)
Cash............................................ $ 1
Receivable for Investments Sold................. 2,649
Dividends Receivable............................ 588
Receivable for Portfolio Shares Sold............ 35
Interest Receivable............................. 1
Other........................................... 2 3,276
----------
LIABILITIES (-4.0%)
Payable for Investments Purchased............... (2,706)
Investment Advisory Fees Payable................ (78)
Administrative Fees Payable..................... (9)
Custodian Fees Payable.......................... (6)
Payable for Portfolio Shares Redeemed........... (3)
Other Liabilities............................... (37) (2,839)
---------- ----------
NET ASSETS (100%)............................................. $ 69,509
----------
----------
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 6,086,542 outstanding $.001 par value shares
(authorized 500,000,000 shares)............................. $11.42
----------
----------
</TABLE>
- ------------------------------------------------------------
+ -- Non-income producing security
REIT -- Real Estate Investment Trust
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
U.S. Real Estate Portfolio
80
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE VALUE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------
COMMON STOCKS (98.1%)
AEROSPACE (2.1%)
33,300 United Technologies Corp.......................... $ 3,159
----------
BANKING (12.5%)
43,750 BankAmerica Corp.................................. 2,833
44,000 Bankers Trust (New York) Corp..................... 2,926
53,700 Chemical Banking Corp............................. 3,155
74,000 First of America Bank Corp........................ 3,283
58,550 Mellon Bank Corp.................................. 3,147
95,000 PNC Bank Corp..................................... 3,064
----------
18,408
----------
CAPITAL GOODS (2.1%)
86,700 Deere & Co........................................ 3,056
----------
CHEMICALS (4.0%)
41,275 Eastman Chemical Co............................... 2,585
27,100 Monsanto Co....................................... 3,320
----------
5,905
----------
COMMUNICATIONS (6.6%)
60,200 NYNEX Corp........................................ 3,251
54,800 SBC Communications, Inc........................... 3,151
84,100 Sprint Corp....................................... 3,353
----------
9,755
----------
CONSUMER-DURABLES (4.9%)
35,000 Chrysler Corp..................................... 1,938
86,800 Ford Motor Co..................................... 2,517
50,900 General Motors Corp............................... 2,692
----------
7,147
----------
CONSUMER-RETAIL (6.8%)
61,800 J.C. Penney Co., Inc.............................. 2,943
194,700 Kmart Corp........................................ 1,411
167,800 TJX Companies, Inc................................ 3,167
189,500 Woolworth Corp.................................... 2,464
----------
9,985
----------
CONSUMER-SERVICE & GROWTH (3.5%)
32,600 Eastman Kodak Co.................................. 2,184
138,900 Ogden Corp........................................ 2,969
----------
5,153
----------
CONSUMER-STAPLES (5.4%)
68,100 American Brands, Inc.............................. 3,039
154,900 Fleming Cos., Inc................................. 3,195
51,500 Heinz (H.J.) Co................................... 1,706
----------
7,940
----------
ENERGY (9.3%)
86,500 Ashland, Inc...................................... 3,038
33,000 Atlantic Richfield, Co............................ 3,655
21,600 Exxon Corp........................................ 1,731
16,050 Royal Dutch Petroleum Co.......................... 2,265
38,350 Texaco, Inc....................................... 3,011
----------
13,700
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------
FINANCIAL-DIVERSIFIED (1.9%)
43,250 Student Loan Marketing Association................ $ 2,849
----------
HEALTH CARE (3.9%)
81,900 Bausch & Lomb, Inc................................ 3,245
59,800 Baxter International, Inc......................... 2,504
----------
5,749
----------
INDUSTRIAL (3.6%)
147,300 Hanson plc ADR.................................... 2,246
57,100 Rockwell International Corp....................... 3,019
----------
5,265
----------
INSURANCE (6.6%)
90,900 American General Corp............................. 3,170
70,000 Lincoln National Corp............................. 3,763
51,000 St. Paul Cos., Inc................................ 2,837
----------
9,770
----------
METALS (2.0%)
48,400 Phelps Dodge Corp................................. 3,013
----------
PAPER & PACKAGING (5.9%)
121,600 Louisiana-Pacific Corp............................ 2,949
66,000 Weyerhauser Co.................................... 2,855
50,400 Willamette Industries, Inc........................ 2,835
----------
8,639
----------
TECHNOLOGY (3.4%)
68,000 Apple Computer, Inc............................... 2,168
51,200 Harris Corp....................................... 2,796
----------
4,964
----------
TRANSPORTATION (3.7%)
+32,000 AMR Corp.......................................... 2,376
128,000 Ryder System, Inc................................. 3,168
----------
5,544
----------
UTILITIES (9.9%)
106,700 General Public Utilities Corp..................... 3,628
92,500 NIPSCO Industries, Inc............................ 3,538
137,400 Pinnacle West Capital Corp........................ 3,950
85,800 Texas Utilities Co................................ 3,529
----------
14,645
----------
TOTAL COMMON STOCKS (Cost $129,825)........................... 144,646
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
- ----------
<C> <S> <C>
SHORT-TERM INVESTMENT (1.6%)
REPURCHASE AGREEMENT (1.6%)
$ 2,342 The Chase Manhattan Bank, N.A., 5.35%, dated
12/29/95, due 1/02/96, to be repurchased at
$2,343, collateralized by $1,905 United States
Treasury Bonds, 7.875%, due 2/15/21, valued at
$2,391 (Cost $2,342)............................ 2,342
----------
TOTAL INVESTMENTS (99.7%) (Cost $132,167)..................... 146,988
----------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Value Equity Portfolio
83
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE VALUE EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- ------------------------------------------------------------
OTHER ASSETS (0.5%)
Receivable for Investments Sold................. $ 326
Dividends Receivable............................ 324
Interest Receivable............................. 1
Other........................................... 8 $ 659
----------
LIABILITIES (-0.2%)
Investment Advisory Fees Payable................ (168)
Payable for Portfolio Shares Redeemed........... (50)
Administrative Fees Payable..................... (20)
Custodian Fees Payable.......................... (5)
Other Liabilities............................... (39) (282)
---------- ----------
NET ASSETS (100%)............................................. $ 147,365
----------
----------
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 10,568,118 outstanding $.001 par value shares
(authorized 500,000,000 shares)............................. $13.94
----------
----------
</TABLE>
- ------------------------------------------------------------
+ -- Non-income producing security
ADR -- American Depositary Receipt
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Value Equity Portfolio
84
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (50.2%)
AEROSPACE (1.0%)
2,300 United Technologies Corp.......................... $ 218
----------
BANKING (6.5%)
3,700 BankAmerica Corp.................................. 240
3,400 Bankers Trust (New York) Corp..................... 226
4,300 Chemical Banking Corp............................. 252
6,100 First of America Bank Corp........................ 271
4,700 Mellon Bank Corp.................................. 252
7,400 PNC Bank Corp..................................... 239
----------
1,480
----------
CAPITAL GOODS (1.1%)
6,900 Deere & Co........................................ 243
----------
CHEMICALS (2.1%)
3,425 Eastman Chemical Co............................... 214
2,100 Monsanto Co....................................... 258
----------
472
----------
COMMUNICATIONS (3.8%)
5,500 NYNEX Corp........................................ 297
5,000 SBC Communications, Inc........................... 288
7,200 Sprint Corp....................................... 287
----------
872
----------
CONSUMER-DURABLES (2.4%)
2,100 Chrysler Corp..................................... 116
7,300 Ford Motor Co..................................... 212
4,300 General Motors Corp............................... 227
----------
555
----------
CONSUMER-RETAIL (3.6%)
4,800 J.C. Penney Co., Inc.............................. 229
17,100 Kmart Corp........................................ 124
14,100 TJX Companies, Inc................................ 266
15,300 Woolworth Corp.................................... 199
----------
818
----------
CONSUMER-SERVICE & GROWTH (1.6%)
2,400 Eastman Kodak Co.................................. 161
9,600 Ogden Corp........................................ 205
----------
366
----------
CONSUMER-STAPLES (3.1%)
5,500 American Brands, Inc.............................. 245
13,700 Fleming Cos., Inc................................. 283
5,100 Heinz (H.J.) Co................................... 169
----------
697
----------
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
ENERGY (4.5%)
6,600 Ashland, Inc...................................... $ 232
2,500 Atlantic Richfield Co............................. 277
1,400 Exxon Corp........................................ 112
1,250 Royal Dutch Petroleum Co.......................... 176
3,000 Texaco, Inc....................................... 236
----------
1,033
----------
FINANCIAL-DIVERSIFIED (0.9%)
3,000 Student Loan Marketing Association................ 198
----------
HEALTH CARE (2.0%)
6,500 Bausch & Lomb, Inc................................ 258
4,600 Baxter International, Inc......................... 192
----------
450
----------
INDUSTRIAL (1.9%)
12,400 Hanson plc ADR.................................... 189
4,400 Rockwell International Corp....................... 233
----------
422
----------
INSURANCE (3.0%)
5,900 American General Corp............................. 206
4,700 Lincoln National Corp............................. 252
3,800 St. Paul Cos., Inc................................ 211
----------
669
----------
METALS (0.9%)
3,100 Phelps Dodge Corp................................. 193
----------
PAPER & PACKAGING (3.0%)
9,500 Louisiana-Pacific Corp............................ 230
5,000 Weyerhauser Co.................................... 216
4,100 Willamette Industries, Inc........................ 231
----------
677
----------
TECHNOLOGY (1.8%)
5,500 Apple Computer, Inc............................... 175
4,200 Harris Corp....................................... 230
----------
405
----------
TRANSPORTATION (1.7%)
+2,200 AMR Corp.......................................... 163
9,200 Ryder System, Inc................................. 228
----------
391
----------
UTILITIES (5.3%)
9,100 General Public Utilities Corp..................... 309
7,500 NIPSCO Industries, Inc............................ 287
11,100 Pinnacle West Capital Corp........................ 319
7,050 Texas Utilities Co................................ 290
----------
1,205
----------
TOTAL COMMON STOCKS (Cost $9,704)............................. 11,364
----------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Balanced Portfolio
87
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE BALANCED PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------
FIXED INCOME SECURITIES (44.5%)
U.S. TREASURY NOTES (44.5%)
$ 4,875 8.25%, 7/15/98.................................... $ 5,218
4,803 5.50%, 4/15/00.................................... 4,843
----------
TOTAL FIXED INCOME SECURITIES (Cost $9,804)................... 10,061
----------
SHORT-TERM INVESTMENT (4.4%)
REPURCHASE AGREEMENT (4.4%)
1,006 The Chase Manhattan Bank, N.A., 5.35%, dated
12/29/95, due 1/02/96, to be repurchased at
$1,007, collateralized by $765 United States
Treasury Bonds, 10.75%, due 2/15/03, valued at
$1,025 (Cost $1,006)............................ 1,006
----------
TOTAL INVESTMENTS (99.1%) (Cost $20,514)...................... 22,431
----------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (1.2%)
Interest Receivable............................. $ 243
Dividends Receivable............................ 24
Other........................................... 1 268
-----
LIABILITIES (-0.3%)
Investment Advisory Fees Payable................ (15)
Payable for Portfolio Shares Redeemed........... (13)
Administrative Fees Payable..................... (4)
Custodian Fees Payable.......................... (2)
Other Liabilities............................... (23) (57)
----- ----------
NET ASSETS (100%)............................................. $ 22,642
----------
----------
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 2,268,132 outstanding $.001 par value shares
(authorized 500,000,000 shares)............................. $9.98
----------
----------
</TABLE>
- ------------------------------------------------------------
+ -- Non-income producing security
ADR -- American Depositary Receipt
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Balanced Portfolio
88
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE EMERGING MARKETS DEBT PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------
DEBT INSTRUMENTS (90.6%)
ALGERIA (3.4%)
LOAN AGREEMENTS (3.4%)
$ p###9,788 Algeria Refinanced Loan Agreements, Tranche A,
(Floating Rate), 6.875%, 12/31/00............... $ 5,090
~p###2,000 Algeria Refinanced Loan Agreements, Tranche A,
(Floating Rate), 12/31/00 (Participation:
Salomon Brothers)............................... 1,040
--------------
6,130
--------------
ARGENTINA (25.9%)
BONDS (25.9%)
$ 3,000 Banco de Galicia 9.00%, 11/01/03.................. 2,629
7,000 Republic of Argentina BOCON, Series 1 DL,
(Floating Rate), 3.188%, 4/01/01................ 6,072
5,200 Republic of Argentina Discount Bonds, (Floating
Rate), 6.563%, 3/31/23.......................... 3,412
/ /26,450 Republic of Argentina Par Bonds, Series L, 5.00%,
3/31/23......................................... 15,110
++28,000 Republic of Argentina, Series L, "Euro", (Floating
Rate), 6.813%, 3/31/05.......................... 19,950
--------------
47,173
--------------
BRAZIL (13.5%)
BONDS (13.5%)
$ / /17,250 Federative Republic of Brazil Par Bond, Series
Z-L, 4.25%, 4/15/24............................. 9,186
/\26,753 Federative Republic of Brazil, Series C, "Euro",
(Floating Rate), PIK, 8.00%, 4/15/14............ 15,349
--------------
24,535
--------------
BULGARIA (0.8%)
BONDS (0.8%)
$ 250 Bulgaria Front Loaded Interest Reduction Bond,
Series A, (Floating Rate), 2.00%, 7/28/12....... 75
#2,983 Bulgaria Interest Arrears Bonds, (Floating Rate),
6.75%, 7/28/11.................................. 1,387
--------------
1,462
--------------
ECUADOR (3.3%)
BONDS (3.3%)
$ 5,000 Republic of Ecuador Discount Bonds, "Euro",
(Floating Rate), 6.813%, 2/28/25................ 2,534
#181 Republic of Ecuador Discount Bonds, (Floating
Rate), 6.813%, 2/28/25.......................... 92
1,900 Republic of Ecuador IE Bonds, (Floating Rate),
6.50%, 12/21/04................................. 1,159
/ /4,000 Republic of Ecuador Par Bond, "Euro", 3.00%,
3/01/25......................................... 1,460
2,043 Republic of Ecuador PDI Bonds, "Euro", (Floating
Rate), PIK, 6.813%, 3/01/15..................... 684
--------------
5,929
--------------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------
MEXICO (7.8%)
BONDS (7.8%)
MXP 19,092 Banamex Pagare Discount Bond 4/03/97.............. $ 1,568
32,143 Banamex Pagare Discount Bond 10/09/97............. 2,293
$ 5,000 Mexican Discount Bond, Series A, (Floating Rate),
6.766%, 12/31/19, (Value Recovery Rights
Attached)....................................... 3,613
5,000 Mexican Discount Bond, Series B, (Floating Rate),
6.766%, 12/31/19, (Value Recovery Rights
Attached)....................................... 3,613
#4,200 Petroleos Mexicanos, 8.625%, 12/01/23............. 3,150
--------------
14,237
--------------
MOROCCO (7.8%)
LOAN AGREEMENTS (7.8%)
$ ~21,000 Kingdom of Morocco Restructuring and Consolidating
Agreement, Tranche A, (Floating Rate), 1/01/09
(Participation: Goldman Sachs, Lehman Brothers,
Paribas, Salomon Brothers)...................... 14,254
--------------
NIGERIA (1.5%)
BONDS (1.5%)
$ 5,500 Nigeria Par Bonds, 6.25%, 11/15/20 (Warrants
Attached)....................................... 2,709
--------------
PANAMA (5.9%)
LOAN AGREEMENTS (5.9%)
$ p###14,313 Republic of Panama Loans.......................... 10,735
--------------
POLAND (1.8%)
NOTE (1.8%)
$ ##3,121 Republic of Poland Note, Zero Coupon, 2/28/96..... 3,211
--------------
RUSSIA (15.4%)
LOAN AGREEMENTS (15.4%)
$ ++15,000 Bank for Foreign Economic Affairs, (Floating
Rate)........................................... 5,119
DEM++86,500 Bank for Foreign Economic Affairs, (Floating
Rate)........................................... 22,923
--------------
28,042
--------------
VENEZUELA (3.5%)
BONDS (3.5%)
$ 11,500 Republic of Venezuela Debt Conversion Bonds,
Series DL, (Floating Rate), 6.563%, 12/18/07.... 6,339
--------------
TOTAL DEBT INSTRUMENTS (Cost $152,483)............................. 164,756
--------------
SHORT TERM INVESTMENTS (8.7%)
MEXICO (8.7%)
BILLS (8.7%)
MXP 20,000 Mexican Cetes, Zero Coupon, 1/18/96............... 2,535
21,716 Mexican Cetes, Zero Coupon, 2/08/96............... 2,683
7,298 Mexican Cetes, Zero Coupon, 2/22/96............... 887
19,994 Mexican Cetes, Zero Coupon, 7/18/96............... 2,079
41,820 Mexican Cetes, Zero Coupon, 8/08/96............... 4,260
35,000 Mexican Cetes, Zero Coupon, 9/26/96............... 3,404
--------------
TOTAL SHORT-TERM INVESTMENTS (Cost $20,430)........................ 15,848
--------------
TOTAL INVESTMENTS (99.3%) (Cost $172,913).......................... 180,604
--------------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Emerging Markets Debt Portfolio
92
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE EMERGING MARKETS DEBT PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
- ------------------------------------------------------------ (000)
OTHER ASSETS (35.7%)
<S> <C> <C>
Interest Receivable............................. $ 2,819
Receivable for Investments Sold................. 37,950
Collateral on Deposit with Broker............... 24,039
Receivable due from Broker...................... 5,000
Receivable for Portfolio Shares Sold............ 63
Other........................................... 12 $ 69,883
-----------
LIABILITIES (-35.0%)
Securities Sold Short, at Value (Proceeds $ (26,242)
$24,470).......................................
Payable for Investments Purchased............... (26,106)
Payable for Reverse Repurchase Agreement........ (12,225)
Bank Overdraft.................................. (2,755)
Interest Payable on Securities Sold Short....... (692)
Investment Advisory Fees Payable................ (443)
Custodian Fees Payable.......................... (50)
Administrative Fees Payable..................... (25)
Payable for Portfolio Shares Redeemed........... (2)
Other Liabilities............................... (69) (68,609)
----------- -----------
NET ASSETS (100%).............................................. $ 181,878
-----------
-----------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE
Applicable to 21,172,632 outstanding $.001 par value shares
(authorized 500,000,000 shares).............................. $8.59
-----------
-----------
</TABLE>
- ------------------------------------------------------------
<TABLE>
<S> <C> <C>
) -- Security is expected to be received in connection
with the restructuring of the Panama loan owned by
the Portfolio.
++ -- Non-income producing security - in default
++ -- Denotes all or a portion of securities subject to
repurchase under Reverse Repurchase Agreements as of
December 31, 1995 -- See Note A-4 to Financial
Statements.
# -- 144A security -- certain conditions for public sale
may exist.
## -- Securities redemption value is linked to the
Republic of Poland Treasury Bill maturing 2/28/96
and to the value of the Polish Zloty and Deutsche
Mark at maturity.
### -- Under restructuring at December 31, 1995 -- see Note
A-8 to Financial Statements.
*** -- Security is valued at cost. See Note A-1.
/ / -- Step Bond -- coupon rate increases in increments to
maturity. Rate disclosed is as of December 31, 1995.
Maturity date disclosed is the ultimate maturity.
~ -- Participation interests were acquired through the
financial institutions indicated parenthetically.
/\ -- 4.00% of 8.00% represents amount paid in cash. The
remainder is payment-in-kind. Cash payment rate
increases in increments to maturity.
p -- Issuer is making partial interest payments.
PDI -- Past Due Interest
PIK -- Payment-In-Kind. Income may be paid in additional
securities or cash at the discretion of the issuer.
DEM -- Deutsche Mark
MXP -- Mexican Peso
Floating Rate -- Interest rate changes on these instruments are based on
changes in a designated base rate. The rates shown are those in effect at
December 31, 1995.
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------
SECURITIES SOLD SHORT (NOTE A-9)
MEXICO
BONDS
$ 20,000 United Mexican States Aztec Bonds (Floating Rate)
7.609%, 3/31/08 (Proceeds $16,900).............. $ 18,000
5,000 United Mexican States Discount Bond, Series D,
(Floating Rate), 6.547%, 12/31/19 (Value
Recovery Rights Attached) (Proceeds $3,500)..... 3,613
----------
21,613
----------
PANAMA
BONDS
#) 2,000 Republic of Panama Interest Reduction Bond,
12/29/49 (Proceeds $820)........................ 905
----------
VENEZUELA
BONDS
6,500 Republic of Venezuela, Par Bond, Series A,
(Floating Rate), 6.75%, 3/31/20 (Oil Warrants
Attached) (Proceeds $3,250)..................... 3,724
----------
(Total Proceeds $24,470).......................... $ 26,242
----------
----------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Emerging Markets Debt Portfolio
93
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE FIXED INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
FIXED INCOME SECURITIES (83.3%)
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (37.8%)
U.S. Treasury Notes (12.1%)
$ 7,000 8.25%, 7/15/98.................................... $ 7,492
10,000 6.25%, 5/31/00.................................... 10,336
2,000 7.25%, 8/15/04.................................... 2,224
----------
20,052
----------
Federal Home Loan Mortgage Corporation (4.4%)
14 13.00%, 9/01/10................................... 16
6,868 9.00%, 1/01/25.................................... 7,227
----------
7,243
----------
Government National Mortgage Association (21.3%)
9 11.00%, 12/15/15.................................. 10
16 10.00%, 5/15/19................................... 17
7,976 6.00%, 2/15/24.................................... 7,757
7,159 8.00%, 3/15/24.................................... 7,459
19,745 7.00%, 5/15/24.................................... 19,980
----------
35,223
----------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS................ 62,518
----------
FOREIGN GOVERNMENT AND AGENCY OBLIGATIONS (14.9%)
5,000 Republic of Italy 6.875%, 9/27/23................. 4,883
5,000 Treuhandanstalt 6.50%, 4/23/03.................... 3,635
22,100 Treuhandanstalt 6.75%, 5/13/04.................... 16,171
----------
TOTAL FOREIGN GOVERNMENT AND AGENCY OBLIGATIONS............. 24,689
----------
CORPORATE BONDS AND NOTES (24.9%)
FINANCE (24.9%)
7,500 CCP Insurance 10.50%, 12/15/04.................... 8,171
#7,500 Farmers Insurance 8.625%, 5/01/24................. 7,781
5,000 Ford Motor Credit Co. 6.25%, 11/08/00............. 5,068
5,000 General Motors Acceptance Corp. 7.375%, 6/22/00... 5,284
5,000 Goldman Sachs Group 7.80%, 7/15/02................ 5,343
3,000 John Hancock 7.375%, 2/15/24...................... 3,002
3,000 Metropolitan Life Insurance 7.80%, 11/01/25....... 3,125
3,000 USX Corp. 9.125%, 1/15/13......................... 3,449
----------
TOTAL CORPORATE BONDS AND NOTES............................. 41,223
----------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
ASSET BACKED SECURITIES (5.7%)
$ 4 Case Equipment Loan Trust, 92-A 5.40%, 6/15/98.... $ 4
26 Federal Home Loan Mortgage Corp., REMIC 16-B
10.00%, 10/15/19................................ 26
19 Federal National Mortgage Association, REMIC
92-59F, (Floating Rate), 6.243%, 8/25/06........ 19
100 Ford Credit Auto Loan Master Trust, 92-1A 6.875%,
1/15/99......................................... 101
7 General Motors Acceptance Corp. Trust, 92-DA
5.55%, 5/15/97.................................. 7
4,001 Resolution Trust Corp., Series 1991-M5, Class A,
9.00%, 3/25/17.................................. 4,171
5,000 Standard Credit Card Trust 6.75%, 6/07/00......... 5,136
----------
TOTAL ASSET BACKED SECURITIES............................... 9,464
----------
TOTAL FIXED INCOME SECURITIES (Cost $129,833)................. 137,894
----------
SHORT-TERM INVESTMENT (15.2%)
REPURCHASE AGREEMENT (15.2%)
25,181 Goldman Sachs & Co., 5.83%, dated 12/29/95, due
1/02/96, to be repurchased at $25,197,
collateralized by $18,310 United States Treasury
Bonds, 9.25%, due 2/15/16, valued at $25,707
(Cost $25,181).................................. 25,181
----------
TOTAL INVESTMENTS (98.5%) (Cost $155,014)..................... 163,075
----------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (1.6%)
Cash............................................ $ 1
Interest Receivable............................. 2,314
Net Unrealized Gain on Forward Foreign Currency 233
Exchange Contracts.............................
Receivable for Portfolio Shares Sold............ 39
Other........................................... 14 2,601
----------
LIABILITIES (-0.1%)
Investment Advisory Fees Payable................ (94)
Administrative Fees Payable..................... (23)
Custodian Fees Payable.......................... (4)
Payable for Portfolio Shares Redeemed........... (1)
Other Liabilities............................... (27) (149)
---------- ----------
NET ASSETS (100%)............................................. $ 165,527
----------
----------
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 15,306,696 outstanding $.001 par value shares
(authorized 500,000,000 shares)............................. $10.81
----------
----------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Fixed Income Portfolio
97
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE FIXED INCOME PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of forward foreign currency exchange contracts open at
December 31, 1995, the Portfolio is obligated to deliver or is to receive
foreign currency in exchange for U.S. dollars as indicated below:
<TABLE>
<CAPTION>
IN NET
CURRENCY EXCHANGE UNREALIZED
TO DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
- ------------ --------- ---------- ------------ --------- ---------------
<S> <C> <C> <C> <C> <C>
DEM 23,100 $ 16,110 1/19/96 U.S.$ 16,360 $ 16,360 $ 250
U.S.$ 16,131 16,131 1/19/96 DEM 23,100 16,110 (21)
DEM 28,500 20,011 6/07/96 U.S.$ 20,015 20,015 4
--------- --------- -----
$ 52,252 $ 52,485 $ 233
--------- --------- -----
--------- --------- -----
</TABLE>
- ------------------------------------------------------------
<TABLE>
<S> <C> <C>
# -- 144A Security. -- Certain conditions for public
sale may exist.
REMIC -- Real Estate Mortgage Investment Conduit
DEM -- Deutsche Mark
Floating Rate -- Interest rate changes on these instruments are based
on changes in a designated base rate. The rates shown are those in
effect on December 31, 1995.
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Fixed Income Portfolio
98
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE GLOBAL FIXED INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
FIXED INCOME SECURITIES (95.7%)
AUSTRALIAN DOLLAR (1.0%)
GOVERNMENT BONDS (1.0%)
AUD 1,300 Government of Australia 9.50%, 8/15/03............ $ 1,044
--------
BRITISH POUND (5.7%)
GOVERNMENT BONDS (5.7%)
GBP 3,800 United Kingdom Treasury 7.00%, 11/06/01........... 5,907
--------
CANADIAN DOLLAR (5.0%)
EUROBONDS (2.6%)
CAD 1,500 British Columbia Province 7.75%, 6/16/03.......... 1,131
2,100 Export-Import Bank of Japan 7.75%, 10/08/02....... 1,588
--------
2,719
--------
GOVERNMENT BONDS (2.4%)
500 Government of Canada 7.50%, 9/01/00............... 380
2,700 Government of Canada 7.50%, 12/01/03.............. 2,039
--------
2,419
--------
5,138
--------
DANISH KRONE (5.8%)
GOVERNMENT BONDS (5.8%)
DKK 15,000 Kingdom of Denmark 8.00%, 11/15/01................ 2,890
9,500 Kingdom of Denmark 7.00%, 12/15/04................ 1,703
7,000 Kingdom of Denmark 8.00%,
3/15/06......................................... 1,328
--------
5,921
--------
DEUTSCHE MARK (15.6%)
GOVERNMENT BONDS (15.6%)
DEM 5,200 German Unity Bond 8.00%, 1/21/02.................. 4,087
7,750 Treuhandanstalt 6.875%, 6/11/03................... 5,746
8,500 Treuhandanstalt 6.75%, 5/13/04.................... 6,219
--------
16,052
--------
FRENCH FRANC (6.8%)
GOVERNMENT BONDS (6.8%)
FRF 24,500 French Treasury Bill 7.75%, 4/12/00............... 5,363
3,500 French Treasury Bill 7.00%, 10/12/00.............. 748
4,250 Republic of France 7.00%, 10/12/00................ 908
--------
7,019
--------
IRISH POUND (1.6%)
GOVERNMENT BONDS (1.6%)
IEP 950 Irish Government 9.25%, 7/11/03................... 1,696
--------
ITALIAN LIRA (4.0%)
GOVERNMENT BONDS (4.0%)
ITL 6,400,000 Republic of Italy Treasury Bond 10.50%,
11/01/00........................................ 4,062
--------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
JAPANESE YEN (8.0%)
EUROBONDS (4.6%)
JPY 425,000 International Bank for Reconstruction &
Development 4.75%, 12/20/04..................... $ 4,703
--------
GOVERNMENT BONDS (3.4%)
300,000 Japan Development Bank 6.50%, 9/20/01............. 3,546
--------
8,249
--------
NETHERLANDS GUILDER (2.0%)
GOVERNMENT BONDS (2.0%)
NLG 3,000 Netherlands Government 7.75%, 1/15/00............. 2,061
--------
NEW ZEALAND DOLLAR (1.6%)
GOVERNMENT BONDS (1.6%)
NZD 1,800 New Zealand Government 8.00%, 7/15/98............. 1,184
750 New Zealand Government 6.50%, 2/15/00............. 475
--------
1,659
--------
SPANISH PESETA (5.1%)
GOVERNMENT BONDS (5.1%)
ESP 612,000 Spanish Government 10.30%, 6/15/02................ 5,216
--------
SWEDISH KRONA (2.8%)
GOVERNMENT BONDS (2.8%)
SEK 17,500 Swedish Government 10.25%, 5/05/00................ 2,829
--------
UNITED STATES DOLLAR (30.7%)
CORPORATE BONDS AND NOTES (6.2%)
U.S.$ ++998 Asset Securitization Corp. 7.10%, 8/13/29......... 1,044
500 Goldman Sachs 6.20%, 2/15/01...................... 498
700 John Hancock 7.375%, 2/15/24...................... 701
898 LB Commercial Conduit Mortgage Trust 7.144%,
8/25/04......................................... 937
#600 Metropolitan Life Insurance 7.45%, 11/01/23....... 588
600 Prudential Insurance Co. 8.30%, 7/01/25........... 644
2,000 UCFC CMO, Series 1995-C1, Class A3, 6.775%,
11/10/17........................................ 2,018
--------
6,430
--------
EUROBONDS (0.5%)
500 Statens Bostads 8.50%, 5/30/97.................... 519
--------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (24.0%)
U.S. TREASURY BONDS
++545 10.75%, 8/15/05................................... 750
++1,280 8.125%, 8/15/19................................... 1,610
U.S. TREASURY NOTES
++650 5.00%, 1/31/99.................................... 645
++2,030 7.75%, 11/30/99................................... 2,199
++890 6.25%, 2/15/03.................................... 929
++675 7.25%, 5/15/04.................................... 751
++2,800 7.50%, 2/15/05.................................... 3,178
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Global Fixed Income Portfolio
102
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE GLOBAL FIXED INCOME PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
U.S. TREASURY STRIPS
U.S.$ ++/\1,600 2/15/98, Principal Only........................... $ 1,434
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
++249 ARM Pool #179778 8.00%, 5/15/02................... 259
+++2,500 7.00%, 1/15/26.................................... 2,525
+++8,250 8.50%, 1/15/26.................................... 8,663
+++1,700 6.00%, 1/20/26.................................... 1,717
--------
24,660
--------
31,609
--------
TOTAL FIXED INCOME SECURITIES (Cost $95,076)......................... 98,462
--------
SHORT-TERM INVESTMENT (13.7%)
REPURCHASE AGREEMENT (13.7%)
14,105 The Chase Manhattan Bank, N.A. 5.35%, dated
12/29/95, due 1/02/96, to be repurchased at
$14,113 collateralized by $10,890 United States
Treasury Bonds, 10.75%, due 5/15/03 valued at
$14,388 (Cost $14,105).......................... 14,105
--------
FOREIGN CURRENCY (0.1%)
JPY 10,094 Japanese Yen (Cost $99)........................... 99
--------
TOTAL INVESTMENTS (109.5%) (Cost $109,280)........................... 112,666
--------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (3.5%)
Cash............................................ $ 531
Interest Receivable............................. 2,496
Receivable for Portfolio Shares Sold............ 411
Net Unrealized Gain on Forward Foreign Currency
Exchange Contracts............................. 132
Foreign Withholding Tax Reclaim Receivable...... 9
Other........................................... 9 3,588
--------
LIABILITIES (-13.0%)
Payable for Investments Purchased............... (12,882)
Bank Overdraft.................................. (411)
Investment Advisory Fees Payable................ (53)
Administrative Fees Payable..................... (14)
Custodian Fees Payable.......................... (12)
Other Liabilities............................... (30) (13,402)
-------- --------
NET ASSETS (100%)................................................... $ 102,852
--------
--------
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 9,164,317 outstanding $.001 par value shares
(authorized 500,000,000 shares).................................... $11.22
----------------
----------------
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of forward foreign currency exchange contracts open at December 31,
1995, the Portfolio is obligated to deliver or is to receive foreign currency in
exchange for U.S. dollars as indicated below:
</TABLE>
<TABLE>
<CAPTION>
NET
CURRENCY TO IN EXCHANGE UNREALIZED
DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
- ------------ --------- ----------- ------------ --------- ---------------
<S> <C> <C> <C> <C> <C>
JPY 10,094 $ 98 1/04/96 U.S.$ 98 $ 98 $ --
NLG 5,600 3,497 2/13/96 U.S.$ 3,530 3,530 33
U.S.$ 1,559 1,559 2/13/96 NLG 2,500 1,562 3
CAD 2,500 1,832 2/14/96 U.S.$ 1,845 1,845 13
JPY 160,000 1,559 2/14/96 U.S.$ 1,620 1,620 61
U.S.$ 794 794 2/14/96 JPY 80,000 780 (14)
DEM 5,000 3,491 2/20/96 U.S.$ 3,571 3,571 80
DEM 5,000 3,494 3/06/96 U.S.$ 3,498 3,498 4
FRF 14,000 2,860 3/07/96 U.S.$ 2,812 2,812 (48)
--------- --------- -----
$ 19,184 $ 19,316 $ 132
--------- --------- -----
--------- --------- -----
</TABLE>
- ------------------------------------------------------------
<TABLE>
<S> <C> <C>
+++ -- Security is subject to delayed delivery -- see Note
A-7.
# -- 144A Security -- Certain conditions for public sale
may exist.
/\ -- Stripped securities represent the splitting of cash
flows into several classes which vary by the
proportion of principal and interest paid. Holders
are entitled to the portion of the payments on the
certificate representing interest only or principal
only.
++ -- Security was pledged as collateral for delayed
delivery securities.
CMO -- Collateralized Mortgage Obligation
</TABLE>
- ------------------------------------------------------------
SUMMARY OF FIXED INCOME SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- --------------------------------------------------------------------
<S> <C> <C>
Finance................................... $ 13,240 12.8%
Foreign Government and Agency
Obligations............................... 60,562 58.9
U.S. Government and Agency Obligations.... 24,660 24.0
--------- ---
$ 98,462 95.7%
--------- ---
--------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Global Fixed Income Portfolio
103
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
------------------------------------------------------------
<C> <S> <C>
CORPORATE BONDS AND NOTES (89.6%)
BROADCAST-RADIO & TELEVISION (21.5%)
$ 2,250 Ackerley Communications, Inc., Series A, 10.75%,
10/01/03........................................ $ 2,408
750 ACT III Broadcasting, Inc., 10.25%, 12/15/05...... 769
1,000 Cablevision Systems Corp., 10.75%, 4/01/04........ 1,058
1,250 Continental Cablevision, Inc., 9.50%, 8/01/13..... 1,328
250 Fundy Cable Ltd., 11.00%, 11/15/05................ 261
/ /1,600 Helicon Group, Series B, 9.00%, 11/01/03.......... 1,544
400 Heritage Media, 11.00%, 10/01/02.................. 421
500 Katz Corp., 12.75%, 11/15/02...................... 525
/ /2,400 Marcus Cable Co., 0.00%, 12/15/05................. 1,632
1,350 New World Communications Group Holding Corp., Zero
Coupon, Series B, 6/15/99....................... 935
900 Rogers Cablesystems Ltd., 11.00%, 12/01/15........ 968
1,500 Viacom, Inc., 8.00%, 7/07/06...................... 1,526
--------
13,375
--------
CHEMICALS (3.4%)
750 Harris Chemical, 10.75%, 10/15/03................. 683
1,000 Plastic Specialties & Technologies, Inc., 11.25%,
12/01/03........................................ 920
500 Sherritt, Inc., 10.50%, 3/31/14................... 533
--------
2,136
--------
COAL, GAS & OIL (0.4%)
33 Columbia Gas Systems, Inc., Series A, 6.39%,
11/28/00........................................ 33
33 Columbia Gas Systems, Inc., Series B, 6.61%,
11/28/02........................................ 33
33 Columbia Gas Systems, Inc., Series C, 6.80%,
11/28/05........................................ 33
33 Columbia Gas Systems, Inc., Series D, 7.05%,
11/28/07........................................ 33
33 Columbia Gas Systems, Inc., Series E, 7.32%,
11/28/10........................................ 33
33 Columbia Gas Systems, Inc., Series F, 7.42%,
11/28/15........................................ 33
33 Columbia Gas Systems, Inc., Series G, 7.62%,
11/28/25........................................ 33
--------
231
--------
ENTERTAINMENT & LEISURE (4.4%)
886 Kloster Cruise Ltd., 13.00%, 5/01/03.............. 673
#/ /2,000 Six Flags Theme Park, Inc., 0.00%, 6/15/05........ 1,560
500 Stena AB, 10.50%, 12/15/05........................ 510
--------
2,743
--------
ENVIRONMENTAL CONTROLS (1.9%)
#1,200 Norcal Waste Systems, 12.50%, 11/15/05............ 1,209
--------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
------------------------------------------------------------
<C> <S> <C>
FINANCIAL SERVICES (6.9%)
#$1,191 GPA Equipment Trust, 9.125%, 12/02/96............. $ 1,179
550 GPA Investments, 6.40%, 11/19/98.................. 451
/ /500 PM Holdings Corp., 0.00%, 9/01/05................. 257
500 Rapp International Finance, 13.25%, 12/15/05...... 491
1,000 Terra Nova Holdings, 10.75%, 7/01/05.............. 1,091
1,189 Tiphook Finance Corp., 8.00%, 3/15/00............. 826
--------
4,295
--------
FOOD (1.7%)
1,150 Pilgrim's Pride Corp., 10.875%, 8/01/03........... 1,044
--------
FOOD SERVICE & LODGING (2.8%)
2,250 Family Restaurant Inc., 9.75%, 2/01/02............ 1,238
500 United Meridian Corp., 10.375%, 10/15/05.......... 526
--------
1,764
--------
GAMING & LODGING (2.0%)
500 Casino America, 11.50%, 11/15/01.................. 462
250 Grand Casinos Inc., 10.125%, 12/01/03............. 261
575 Louisiana Casino Cruises, 11.50%, 12/01/98........ 552
--------
1,275
--------
HEALTH CARE SUPPLIES & SERVICES (2.6%)
1,000 Quorum Health Group, Inc., 8.75%, 11/01/05........ 1,035
500 Tenet Healthcare Corp., 10.125%, 3/01/05.......... 554
--------
1,589
--------
MATERIALS (3.4%)
500 IMC Fertilizer, 9.25%, 10/01/00................... 526
1,500 IMC Fertilizer, 9.45%, 12/15/11................... 1,599
--------
2,125
--------
METALS (2.0%)
750 Algoma Steel Inc., (Yankee Bond), 12.375%,
7/15/05......................................... 675
650 Sheffield Steel Corp., 12.00%, 11/01/01........... 566
--------
1,241
--------
MULTI-INDUSTRY (0.4%)
#250 Howmet Corp., 10.00%, 12/01/03.................... 260
--------
PACKAGING & CONTAINER (5.1%)
500 Owens-Illinois, Inc., 10.50%, 6/15/02............. 531
1,500 Owens-Illinois, Inc., 9.95%, 10/15/04............. 1,594
1,000 Stone Container Corp., 10.75%, 10/01/02........... 1,033
--------
3,158
--------
PUBLISHING (1.8%)
750 Marvel III Holdings Inc., Series B, 9.125%,
2/15/98......................................... 734
500 Marvel Parent Holdings, Zero Coupon, 4/15/98...... 360
--------
1,094
--------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
High Yield Portfolio
106
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE HIGH YIELD PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
------------------------------------------------------------
<C> <S> <C>
REAL ESTATE (0.8%)
$#500 HMC Acquisition Properties, 9.00%, 12/15/07....... $ 505
--------
RETAIL-GENERAL (6.3%)
750 Grand Union Co., 12.00%, 9/01/04.................. 645
#800 Host Marriot Travel Plaza, Series B, 9.50%,
5/15/05......................................... 790
3,000 Southland Corp., 5.00%, 12/15/03.................. 2,498
--------
3,933
--------
TELECOMMUNICATIONS (9.3%)
/ /3,000 Dial Call Communications, 0.00%, 4/15/04.......... 1,710
/ /450 Horizon Cellular Telephone, 0.00%, 10/01/00....... 374
/ /2,250 Nextel Communications, 0.00%, 8/15/04............. 1,221
400 Paging Network, 10.125%, 8/01/07.................. 434
500 Rogers Communications, Inc., 10.875%, 4/15/04..... 522
1,500 Telefonica de Argentina, (Yankee Bond), 11.875%,
11/01/04........................................ 1,571
--------
5,832
--------
TEXTILES & APPAREL (4.1%)
1,000 Polysindo Eka Perkasa, (Yankee Bond), 13.00%,
6/15/01......................................... 1,035
500 Synthetic Industries, 12.75%, 12/01/02............ 494
1,000 Westpoint Stevens, Inc., 9.375%, 12/15/05......... 992
--------
2,521
--------
TRANSPORTATION (2.4%)
*243 America West Airlines, 6.00%, 3/31/97 (acquired
1/17/94 Cost $232).............................. 228
1,500 Venture Holdings, 9.75%, 4/01/04.................. 1,253
--------
1,481
--------
UTILITIES (6.4%)
1,478 Beaver Valley Funding Corp., (Lease Obligation
Bond), 9.00%, 6/01/17........................... 1,247
1,250 California Energy Co., Inc., 9.875%, 6/30/03...... 1,303
1,400 First PV Funding Corp., (Lease Obligation Bond),
Series 1986B, 10.15%, 1/15/16................... 1,428
--------
3,978
--------
TOTAL CORPORATE BONDS AND NOTES (Cost $54,542)................ 55,789
--------
FOREIGN GOVERNMENT BONDS (3.8%)
BONDS (3.8%)
/ /2,500 Federative Republic of Brazil, Par Bond, Series
Z-L, 4.25%, 4/15/24............................. 1,313
1,500 Republic of Argentina, Series L, "Euro" (Floating
Rate), 6.813%, 3/31/05.......................... 1,068
--------
TOTAL FOREIGN GOVERNMENT BONDS (Cost $2,018).................. 2,381
--------
<CAPTION>
VALUE
SHARES (000)
------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (0.8%)
BUILDING MATERIALS & COMPONENTS (0.6%)
+30,331 Walter Industries, Inc............................ $ 398
--------
FINANCIAL SERVICES (0.0%)
+1,268 WestFed Holdings, Inc., Class B................... --
--------
FOOD SERVICE & LODGING (0.2%)
+1,300 Motels of America, Inc............................ 98
--------
GAMING & LODGING (0.0%)
+500 Trump Taj Mahal, Class A.......................... 10
--------
TOTAL COMMON STOCKS (Cost $599)............................... 506
--------
PREFERRED STOCKS (0.1%)
FINANCIAL SERVICES (0.0%)
3,239 WestFed Holdings, Inc., Series A.................. --
--------
COAL, GAS & OIL (0.1%)
+925 Columbia Gas Systems, Inc., Series A, 7.89%....... 23
--------
TOTAL PREFERRED STOCKS (Cost $80)............................. 23
--------
CONVERTIBLE PREFERRED STOCKS (0.0%)
COAL, GAS & OIL (0.0%)
566 Columbia Gas Systems, Inc., Series B, 5.22%,
11/28/00 (Cost $23)............................. 22
--------
<CAPTION>
NO. OF
RIGHTS
- ----------
<C> <S> <C>
RIGHTS (0.0%)
BROADCAST-RADIO & TELEVISION (0.0%)
++35,000 SpectraVision, Inc., expiring 10/08/97 (Cost
$133)........................................... 2
--------
<CAPTION>
NO. OF
WARRANTS
- ----------
<C> <S> <C>
WARRANTS (0.6%)
AEROSPACE & DEFENSE (0.0%)
+*500 Sabreliner Corp., expiring 4/15/03 (acquired
6/21/93, cost $10).............................. 3
--------
ELECTRICAL EQUIPMENT (0.4%)
+#28,000 Protection One Alarm, Inc., expiring 4/03/03...... 224
--------
GAMING & LODGING (0.0%)
+#2,700 Casino Magic Corp., expiring 10/14/96............. --
+1,725 Louisiana Casino Cruises, expiring 12/01/98....... 14
--------
14
--------
INSURANCE (0.0%)
+500 Horace Mann Educators Corp., expiring 4/3/99...... 7
--------
METALS (0.1%)
+8,250 Sheffield Steel Corp., expiring 11/01/01.......... 41
--------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
High Yield Portfolio
107
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE HIGH YIELD PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NO. OF VALUE
WARRANTS (000)
------------------------------------------------------------
<C> <S> <C>
PACKAGING & CONTAINER (0.0%)
+1,000 Crown Packaging Holdings, expiring 11/01/03....... $ 8
--------
REAL ESTATE (0.1%)
+1,000 Petro PSC Properties L.P., expiring 6/01/97....... 34
--------
TELECOMMUNICATIONS (0.0%)
+3,000 Dial Page, Inc., expiring 4/25/99................. --
--------
TOTAL WARRANTS (Cost $228).................................... 331
--------
<CAPTION>
NO. OF
UNITS
- ----------
<C> <S> <C>
UNITS (4.7%)
BROADCAST-RADIO & TELEVISION (1.2%)
#/ /1,250 American Telecasting, 14.50%, 8/15/05............. 756
--------
GAMING & LODGING (2.0%)
++#2,208 Maritime Group Series A, 13.50%, 2/15/97.......... 309
964 Trump Taj Mahal Funding Inc., PIK, 9.375%,
11/15/99........................................ 928
--------
1,237
--------
METALS (1.5%)
1,000 Sheffield Steel Corp. (1st Mortgage Bond + 5
Common Stock Warrants), 12.00%, 11/01/01........ 940
--------
TOTAL UNITS (Cost $5,131)..................................... 2,933
--------
TOTAL INVESTMENTS (99.6%) (Cost $62,754)...................... 61,987
--------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (1.9%)
Interest Receivable............................. $1,144
Receivable for Portfolio Shares Sold............ 32
Other........................................... 7 1,183
-----------
LIABILITIES (-1.5%)
Bank Overdraft.................................. (598)
Payable for Portfolio Shares Redeemed........... (214)
Investment Advisory Fees Payable................ (70)
Administrative Fees Payable..................... (9)
Custodian Fees Payable.......................... (3)
Other Liabilities............................... (31) (925)
----------- --------
NET ASSETS (100.0%)............................................ $62,245
--------
--------
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 5,951,111 outstanding $.001 par value shares
(authorized 500,000,000 shares).............................. $10.46
--------
--------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------
<S> <C> <C>
+ -- Non-income producing security
++ -- Non-income producing security -- in default
* -- Restricted as to public resale. Total value of
restricted securities held at December 31, 1995 was
$231 or 0.4% of net assets (Total Cost $242).
# -- 144A Security -- Certain conditions for public sale
may exist.
/ / -- Step Bond -- Coupon rate increases in increments to
maturity. Rate disclosed is as of December 31, 1995.
Maturity date disclosed is the ultimate maturity.
PIK -- Payment-In-Kind. Income may be paid in additional
securities or cash at the discretion of the issuer.
</TABLE>
Floating Rate -- Interest rate changes on these instruments are based on changes
in a designated base rate. The rates shown are those in effect on December 31,
1995.
At December 31, 1995, approximately 99% of the Portfolio's net assets consisted
of high yield securities rated below investment grade. Investments in high yield
securities are accompanied by a greater degree of credit risk and the risk tends
to be more sensitive to economic conditions than higher rated securities.
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
High Yield Portfolio
108
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE MUNICIPAL BOND PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE AMOUNT VALUE
(000) (000)
- ------------------------------------------------------
<C> <S> <C>
TAX-EXEMPT INSTRUMENTS (98.0%)
DAILY VARIABLE RATE BONDS (1.5%)
$ 400 Platte County, Wyoming,
Pollution Control Revenue
Bonds, Series A, 6.00%,
7/01/14..................... $ 400
300 Port of Saint Helens, Oregon,
Pollution Control Revenue
Bonds, Series A, Portland
General Electric Co. 5.95%,
4/01/10..................... 300
--------
TOTAL DAILY VARIABLE RATE BONDS (Cost
$700)....................................... 700
--------
FIXED RATE INSTRUMENTS (96.5%)
1,000 Connecticut State Special
Obligation, Tax Revenue
Bonds, Transportation,
6.50%, 7/01/09, Prerefunded
7/01/99 at 102.............. 1,096
1,000 De Kalb County, Georgia,
General Obligation Bonds,
7.30%, 1/01/00, Prerefunded
1/01/97 at 102.............. 1,057
1,000 De Kalb County, Georgia, Water
& Sewer Revenue Bonds 7.00%,
10/01/06.................... 1,081
1,000 Delaware Transportation
Authority, Transportation
System Revenue Bonds, 6.50%,
7/01/11, Prerefunded 7/01/01
at 102...................... 1,122
2,000 Florida State General
Obligation Bonds, 5.88%,
6/01/24..................... 2,059
1,000 Georgia State, General
Obligation Bonds, Series E,
6.75%, 12/01/02............. 1,146
500 Hawaii State, General
Obligation Bonds, Series BS,
6.70%, 9/01/97.............. 523
1,000 Hawaii State, General
Obligation Bonds, Series CJ,
6.20%, 1/01/12.............. 1,079
1,000 Howard County, Maryland,
Consolidated Public
Improvement General
Obligation Bonds, Series A,
7.20%, 8/01/03, Prerefunded
8/01/96 at 102.............. 1,041
1,500 Intermountain Power Agency,
Utah, Power Supply Revenue
Bonds, Series D, 8.38%,
7/01/12..................... 1,621
1,000 Kentucky State Housing Corp.
Revenue Bonds, Series A,
6.00%, 7/01/10.............. 1,039
1,155 Maryland State Department of
Transportation, Construction
Revenue Bonds, Second Issue,
6.80%, 11/01/05, Prerefunded
11/01/99 at 102............. 1,285
1,000 Massachusetts State
Consolidated Loan, Series A,
7.50%, 3/01/03, Prerefunded
3/01/00 at 102.............. 1,141
500 Massachusetts State
Consolidated Loan, Series A,
7.63%, 6/01/08, Prerefunded
6/01/01 at 102.............. 588
2,000 Massachusetts State Special
Obligation Revenue Bonds,
Series A 6.00%, 6/01/13..... 2,083
1,625 Michigan State Housing
Development Authority
Revenue Bonds, Series A,
6.75%, 12/01/14............. 1,719
1,500 Minnesota State General
Obligation Bonds, 7.00%,
8/01/99, Prerefunded 8/01/96
at 100...................... 1,530
<CAPTION>
FACE AMOUNT VALUE
(000) (000)
- ------------------------------------------------------
<C> <S> <C>
$ 1,590 Minnesota State Infrastructure
Development, General
Obligation Bonds, 6.80%,
8/01/03, Prerefunded 8/01/00
at 100...................... $ 1,762
1,400 Mississippi State General
Obligation Bonds, 6.00%,
2/01/09..................... 1,503
1,475 Montana State General
Obligation Bonds, Long Range
Building Program, Series C,
6.00%, 8/01/13.............. 1,571
1,000 New Castle County, Delaware,
General Obligation Bonds,
6.25%, 10/15/01............. 1,100
1,000 New York State Local
Government Assistance Corp.
Revenue Bonds, Series B,
7.50%, 4/01/20, Prerefunded
4/01/01 at 102.............. 1,170
500 Ohio State General Obligation
Bonds, 6.20%, 8/01/12....... 549
1,000 Ohio State Housing Finance
Agency, Residential Mortgage
Revenue Bonds, Series A-1,
6.20%, 9/01/14.............. 1,038
525 Pennsylvania State General
Obligation Bonds, Series A,
6.50%, 1/01/00.............. 568
1,000 Pennsylvania State Higher
Educational Facilities
Authority, Colleges &
Universities Revenue Bonds,
6.50%, 9/01/02.............. 1,118
1,000 Redmond, Washington, General
Obligation Bonds, 5.75%,
12/01/05.................... 1,082
1,000 Reedy Creek Improvement
District, Florida, Utility
Revenue Bonds, Series 91-1,
6.50%, 10/01/16, Prerefunded
10/01/01 at 101............. 1,124
1,400 Rhode Island Depositors
Economic Protection Corp.,
Special Obligation Revenue
Bonds, Series A, 7.25%,
8/01/21, Prerefunded 8/01/96
at 102...................... 1,458
1,350 San Antonio, Texas, General
Obligation Bonds, 6.50%,
8/01/14..................... 1,484
1,000 Tulsa, Oklahoma, General
Obligation Bonds, 6.38%,
2/01/02..................... 1,106
1,000 Virginia Beach, Virginia,
General Obligation Bonds,
6.00%, 9/01/10.............. 1,075
500 Virginia State Housing
Development Authority,
Commonwealth Mortgage
Revenue Bonds, Series B,
6.60%, 1/01/12.............. 531
1,000 Virginia State Housing
Development Authority,
Commonwealth Mortgage
Revenue Bonds, Series B,
6.65%, 1/01/13.............. 1,066
1,000 Washington State General
Obligation Bonds, Series B,
6.20%, 6/01/01.............. 1,088
1,500 Washington State General
Obligation Bonds, Series
86-D, 8.00%, 9/01/09,
Prerefunded 9/01/96 at
100......................... 1,544
500 Washington Suburban Sanitary
District, General Obligation
Revenue Bonds, 6.50%,
11/01/05, Prerefunded
11/01/01 at 102............. 565
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Municipal Bond Portfolio
111
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE MUNICIPAL BOND PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE AMOUNT VALUE
(000) (000)
- ------------------------------------------------------
<C> <S> <C>
$ 500 Washington Suburban Sanitary
District, General Obligation
Revenue Bonds, 6.30%,
1/01/07, Prerefunded 1/01/02
at 102...................... $ 557
--------
TOTAL FIXED RATE INSTRUMENTS (Cost
$42,634).................................... 44,269
--------
TOTAL TAX-EXEMPT INSTRUMENTS (98.0%) (Cost
$43,334).................................... 44,969
--------
TOTAL INVESTMENTS (98.0%) (Cost $43,334).... 44,969
--------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (2.1%)
Cash........................ $ 37
Interest Receivable......... 922
Other....................... 1 960
----------
LIABILITIES (-0.1%)
Investment Advisory Fees
Payable.................... (11)
Payable for Portfolio Shares
Redeemed................... (7)
Administrative Fees
Payable.................... (7)
Custodian Fees Payable...... (2)
Other Liabilities........... (33) (60)
---------- --------
NET ASSETS (100%)......................... $ 45,869
--------
--------
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 4,422,080 outstanding
$.001 par value shares (authorized
500,000,000 shares)..................... $10.37
--------
--------
</TABLE>
- ------------------------------------------------
Variable/Floating Rate Instruments. The interest rate changes on these
instruments are based upon a designated base rate. These instruments are payable
on demand and are secured by a letter of credit or other support agreements.
Maturity dates disclosed for Variable/Floating Rate Instruments are the ultimate
maturity dates. The effective maturity dates for such securities are the next
interest reset dates which are seven days or less.
Prerefunded Bonds. Outstanding Bonds have been refunded to the first call date
(prerefunded date) by the issuance of new bonds. Principal and interest are paid
from monies escrowed in U.S. Treasury securities. Prerefunded bonds are
generally re-rated AAA due to the Treasury escrow.
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Municipal Bond Portfolio
112
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
MONEY MARKET INSTRUMENTS (93.5%)
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (70.5%)
AGENCY DISCOUNT NOTES (44.4%)
Federal Home Loan Bank
$ 50,000 6.10%, 1/02/96.................................... $ 49,991
10,000 5.47%, 1/22/96.................................... 9,968
15,000 5.56%, 1/24/96.................................... 14,947
10,000 5.56%, 2/01/96.................................... 9,952
25,000 5.47%, 3/06/96.................................... 24,753
Federal Home Loan Mortgage Corp.
25,000 5.59%, 1/16/96.................................... 24,942
Federal National Mortgage Corp.
25,000 5.61%, 1/05/96.................................... 24,984
25,000 5.67%, 1/09/96.................................... 24,969
15,000 5.56%, 1/10/96.................................... 14,979
25,000 5.55%, 1/19/96.................................... 24,931
30,000 5.63%, 1/24/96.................................... 29,892
20,000 5.58%, 1/26/96.................................... 19,923
20,000 5.57%, 2/08/96.................................... 19,882
25,000 5.57%, 2/14/96.................................... 24,830
18,000 5.50%, 2/28/96.................................... 17,841
20,000 5.45%, 4/05/96.................................... 19,712
15,000 5.37%, 4/30/96.................................... 14,731
----------
371,227
----------
AGENCY FLOATING RATE NOTES (23.8%)
Federal National Mortgage Association
25,000 5.53%, 11/20/96................................... 24,985
65,000 5.85%, 9/02/97.................................... 65,000
25,000 5.26%, 6/02/99.................................... 25,000
13,000 5.26%, 7/26/99.................................... 12,950
25,000 5.26%, 9/22/99.................................... 25,000
Student Loan Marketing Association
46,000 5.40%, 10/30/97................................... 46,053
----------
198,988
----------
U.S. TREASURY STRIPS (2.3%)
/\20,000 5/15/96, Principal Only........................... 19,587
----------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS
(Cost $589,802)............................................. 589,802
----------
COMMERCIAL PAPER (11.9%)
FINANCE (11.9%)
15,000 Abbey National North America 5.62%, 1/16/96....... 14,965
10,000 Commerzbank 5.58%, 1/31/96........................ 9,954
35,000 Koch Industries 5.65%, 1/19/96.................... 34,901
20,000 Pfizer, Inc., 5.70%, 1/17/96...................... 19,949
20,000 Pfizer, Inc., 5.70%, 1/19/96...................... 19,943
----------
TOTAL COMMERCIAL PAPER (Cost $99,712)......................... 99,712
----------
CORPORATE FLOATING RATE NOTES (3.0%)
FINANCE (3.0%)
15,000 General Electric Credit Corp. 5.85%, 2/09/96...... 15,000
10,000 General Electric Credit Corp. 5.85%,
2/15/96......................................... 10,000
----------
TOTAL CORPORATE FLOATING RATE NOTES (Cost $25,000)............ 25,000
----------
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
CERTIFICATES OF DEPOSIT (8.1%)
$ 30,000 Deutsche Bank (Yankee) 5.64%, 3/08/96............. $ 30,000
30,000 Rabo Bank, New York (Yankee) 5.75%, 3/06/96....... 30,001
8,000 Rabo Bank New York (Yankee) 5.93%, 5/16/96........ 8,003
----------
TOTAL CERTIFICATES OF DEPOSIT (Cost $68,004).................. 68,004
----------
TOTAL MONEY MARKET INSTRUMENTS (Cost $782,518)................ 782,518
----------
<CAPTION>
AMOUNT
(000)
----------
<C> <S> <C>
SHORT TERM INVESTMENT (6.5%)
REPURCHASE AGREEMENT (6.5%)
53,913 Goldman Sachs 5.83%, dated 12/29/95, due 1/02/96,
to be repurchased at $53,948, collateralized by
$39,585, United States Treasury Bonds, 10.375%,
due 11/15/11, valued at $55,023 (Cost
$53,913)........................................ 53,913
----------
TOTAL INVESTMENTS (100.0%) (Cost $836,431).................... 836,431
----------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (0.3%)
Cash............................................ $ 1
Interest Receivable............................. 2,802
Other........................................... 57 2,860
----------
LIABILITIES (-0.3%)
Dividends Payable............................... (1,718)
Investment Advisory Fees Payable................ (638)
Administrative Fees Payable..................... (116)
Custodian Fees Payable.......................... (22)
Other Liabilities............................... (104) (2,598)
---------- ----------
NET ASSETS (100%)............................................. $ 836,693
----------
----------
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 836,710,488 outstanding
$.001 par value shares (authorized 4,000,000,000 shares)....
$1.00
----------
----------
</TABLE>
- ------------------------------------------------------------
/\ -- Stripped securities represent the splitting of cash flows into several
classes which vary by the proportion of principal and interest paid.
Holders are entitled to the portion of the payments on the certificate
representing interest only or principal only.
Floating Rate -- The interest rate changes on these instruments are based on
changes in a designated base rate. The rates shown are those in effect at
December 31, 1995.
Maturity dates disclosed for Floating Rate Instruments are the ultimate maturity
dates. The effective maturity dates for such securities are the next interest
reset dates.
Interest rates disclosed for Commercial Paper and Agency Discount Notes
represent effective yields at December 31, 1995.
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Money Market Portfolio
115
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE MUNICIPAL MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
TAX-EXEMPT INSTRUMENTS (96.4%)
FIXED RATE INSTRUMENTS (43.9%)
NOTES (2.0%)
$ 3,400 Charleston, South Carolina, Water & Sewer System
Revenue, 7.50%, 1/01/14
Prerefunded 1/01/96 at 102...................... $ 3,468
500 Du Page Water Commission, Illinois, 7.10%,
3/01/96......................................... 503
5,000 New York State Urban Development Correctional
Facilities, 8.00%, 1/01/15 Prerefunded 1/01/96
at 102.......................................... 5,100
----------
9,071
----------
PUT OPTION BONDS (0.4%)
1,000 York County, South Carolina, Series B-4, 3.75%,
9/15/14 (Putable 3/15/96)....................... 1,000
1,000 York County, South Carolina, Series E-2, 3.80%,
8/15/14 (Putable 2/15/96)....................... 1,000
----------
2,000
----------
TAX & REVENUE ANTICIPATION NOTES (1.6%)
4,000 Colorado State, 4.50%, 6/27/96, TRANS............. 4,012
3,000 Texas State, Series 95A, 4.75%, 8/30/96, TRANS.... 3,013
----------
7,025
----------
COMMERCIAL PAPER (39.9%)
3,000 Beaver County, Pennsylvania, Industrial
Development Authority, Duquesne Light, Series
90, 3.75%, 2/14/96.............................. 3,000
4,000 Burke County, Georgia, Development Authority,
Oglethorpe, Series 92A, 3.80%, 2/15/96.......... 4,000
2,000 Burlington, Kansas, Kansas City Power & Light Co.,
Series 87A, 3.70%, 2/20/96...................... 2,000
2,700 Burlington, Kansas, Kansas City Power & Light Co.,
Series 87B, 3.70%, 2/20/96...................... 2,700
3,500 City of Austin, Texas, Series A, 3.55%, 3/28/96... 3,500
4,530 City of Dallas, Texas, 3.80%, 2/05/96............. 4,530
6,000 City of Honolulu, Hawaii, 3.75%, 2/12/96.......... 6,000
1,900 City of San Antonio, Texas, 3.70%, 2/12/96........ 1,900
10,000 Commonwealth of Massachusetts, Series A, 3.70%,
1/09/96......................................... 10,000
5,000 Commonwealth of Virginia, 3.83%, 1/10/96.......... 5,000
1,200 Connecticut State Health & Education Facilities
Authority, Yale University, Series N, 3.70%,
1/12/96......................................... 1,200
2,525 Gainesville, Florida, Series C, 3.85%, 1/30/96.... 2,525
4,000 Georgia Municipal Gas Authority, 3.75%, 2/23/96... 4,000
2,000 Illinois Development Finance Authority, Series
93A, 3.65%, 2/16/96............................. 2,000
1,000 Illinois Health & Education, Series 89A, 3.75%,
2/22/96......................................... 1,000
4,000 Independence, Missouri, Water Utility Revenue,
3.75%, 2/12/96.................................. 4,000
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
$ 3,100 Intermountain Power Agency, Utah, Series E 3.75%,
2/07/96......................................... $ 3,100
2,400 Intermountain Power Agency, Utah, Series E, 3.75%,
2/23/96......................................... 2,400
700 Intermountain Power Agency, Utah, Series F2,
3.90%, 1/11/96.................................. 700
1,500 Intermountain Power Agency, Utah, Series 85F,
3.90%, 1/11/96.................................. 1,500
3,100 Jacksonville, Florida, Electric Authority, Series
C-1, 3.50%, 3/07/96............................. 3,100
7,700 Jacksonville, Florida, Electric Authority, 3.65%,
2/16/96......................................... 7,700
3,600 Jasper County, Indiana, Series 88B, 3.75%,
2/06/96......................................... 3,600
2,000 Jasper County, Indiana, Series 88C, 3.75%,
2/06/96......................................... 2,000
1,100 Lehigh County, Pennsylvania, 3.85%, 1/30/96....... 1,100
6,600 Massachusetts Health & Education Facilities
Authority, Harvard University, Series L, 3.80%,
2/09/96......................................... 6,600
6,020 Montgomery, Alabama, Industrial Development Board,
General Electric Series, 3.80%, 2/08/96......... 6,020
4,000 Mount Vernon, Indiana, Pollution Control & Solid
Waste Disposal Revenue Bonds, General Electric
Project, Series 89A, 3.70%, 2/27/96............. 4,000
4,000 Mount Vernon, Indiana, Pollution Control & Solid
Waste Disposal Revenue Bonds, General Electric
Project, Series 89A, 3.80%, 2/07/96............. 4,000
4,025 North Carolina Eastern Municipal Power, 3.75%,
2/26/96......................................... 4,025
300 Northeastern Pennsylvania Hospital Authority,
Series B, 3.85%, 2/07/96........................ 300
2,990 Omaha, Nebraska, Public Power District, 3.85%,
2/07/96......................................... 2,990
1,000 Peninsula Ports Authority, Virginia, Series 92,
3.75%, 2/12/96.................................. 1,000
3,000 Petersburg, Indiana, Indiana Power & Light, Series
91, 3.70%, 2/13/96.............................. 3,000
2,200 Platte River Authority, Colorado, 3.80%,
1/22/96......................................... 2,200
1,000 Rochester, Minnesota, Health Facilities, Mayo
Clinic, Series B, 3.80%, 2/08/96................ 1,000
1,500 Rochester, Minnesota, Health Facilities, Mayo
Clinic, Series C, 3.80%, 2/08/96................ 1,500
1,065 Rochester, Minnesota, Health Facilities, Mayo
Clinic, Series E, 3.80%, 2/08/96................ 1,065
1,500 Rochester, Minnesota, Health Facilities, Mayo
Clinic, Series F, 3.75%, 2/26/96................ 1,500
5,750 State of Louisiana, General Obligation Bond,
3.80%, 2/21/96.................................. 5,750
8,950 Sunshine State, Florida, Government Finance
Authority, Series 86, 3.50%, 3/08/96............ 8,950
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Municipal Money Market Portfolio
118
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE MUNICIPAL MONEY MARKET PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
$ 5,000 Sweetwater County, Wyoming, Series 88A, 3.50%,
3/08/96......................................... $ 5,000
6,000 Salt River, Arizona, 3.90%, 1/17/96............... 6,000
2,000 Salt River, Arizona, 3.75%, 2/14/96............... 2,000
3,000 State of New York, General Obligation Bond, BAN,
Series Q, 3.75%, 2/05/96........................ 3,000
2,000 Sunshine State, Florida, Government Finance
Authority, Series 86, 3.85%, 1/30/96............ 2,000
6,600 Texas Municipal Power Agency, 3.65%, 2/15/96...... 6,600
2,000 Texas Municipal Power Agency, 3.75%, 2/22/96...... 2,000
1,000 Trimble County, Kentucky, Louisville Gas &
Electric Series, 3.70%, 2/13/96................. 1,000
5,000 Trimble County, Kentucky, Louisville Gas &
Electric Series, 3.80%, 3/07/96................. 5,000
5,500 University of Minnesota, Series A, 3.80%,
2/06/96......................................... 5,500
3,000 University of Texas, Series A, 3.80%, 2/05/96..... 3,000
2,500 Vanderbilt University, Tennessee, Series 89A,
3.75%, 2/22/96.................................. 2,500
----------
180,055
----------
TOTAL FIXED RATE INSTRUMENTS............................ 198,151
----------
VARIABLE/FLOATING RATE INSTRUMENTS (52.5%)
DAILY VARIABLE RATE BONDS (34.1%)
1,500 Ascension Parish, Louisiana, Pollution Control
Revenue Bonds, Shell Oil Project, 6.00%,
9/01/23......................................... 1,500
2,400 Birmingham, Alabama, Medical Clinic Board Revenue,
University of Alabama Hospital Services Fund,
6.10%, 12/01/26................................. 2,400
5,500 Burke County, Georgia, Development Authority,
Series 94, 5.50%, 7/01/24....................... 5,500
6,300 Burke County, Georgia, Development Authority,
6.00%, 4/01/25.................................. 6,300
6,000 California Pollution Control Financing Authority,
Southern Edison, Series 86A, 5.40%, 2/28/08..... 6,000
4,000 Chattanooga-Hamilton County, Tennessee, Hospital
Authority Revenue, Erlanger Medical Center,
6.10%, 10/01/17................................. 4,000
4,200 Chicago, Illinois, O'Hare International Airport
Special Facilities Revenue Bonds, American
Airlines, Series A, 6.00%, 12/01/17............. 4,200
4,200 Chicago, Illinois, O'Hare International Airport
Special Facilities Revenue Bonds, American
Airlines, Series B, 6.00%, 12/01/17............. 4,200
700 Delaware County, Pennsylvania, Industrial
Development Authority, Series 95, 6.00%,
12/01/09........................................ 700
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
$ 1,700 Delta County, Michigan, Pollution Control Revenue
Bonds, Mead Corp., 5.90%, 12/01/23.............. $ 1,700
700 East Baton Rouge Parish, Louisiana, Pollution
Control Revenue Bonds, Exxon Project, 5.90%,
11/01/19........................................ 700
1,000 Hapeville, Georgia, Industrial Development
Authority, Series 85, 6.00%, 11/01/15........... 1,000
3,700 Harris County, Texas, Health Facilities
Development Corp., St. Lukes Episcopal, Series
6.00%, 2/15/16.................................. 3,700
200 Harris County, Texas, Pollution Control Revenue
Bonds, Exxon Project, Series 84B, 6.00%,
3/01/24......................................... 200
5,700 Hurley, New Mexico, Pollution Control Revenue
Bonds, 5.95%, 12/01/15.......................... 5,700
8,600 Jackson County, Mississippi, Port Facility,
Chevron Project, Series 93, 5.95%, 6/01/23...... 8,600
900 Kansas City, Kansas, Industrial Development
Authority, PQ Corp., 6.00%, 8/01/15............. 900
1,900 Lake Charles, Louisiana, Harbor & Terminal
District Port Facilities, Series 84, 5.95%,
11/01/11........................................ 1,900
2,500 Lincoln County, Wyoming, Pollution Control Revenue
Bonds, Exxon Project, Series 84A, 5.90%,
11/01/14........................................ 2,500
4,400 Lincoln County, Wyoming, Pollution Control Revenue
Bonds, Exxon Project, Series 84A, 5.95%,
8/01/15......................................... 4,400
900 Lincoln County, Wyoming, Pollution Control Revenue
Bonds, Exxon Project, Series 84D, 5.90%,
11/01/14........................................ 900
1,620 Louisiana Public Facilities Authority, Industrial
Development, Kenner Hotel Series, 6.00%,
12/01/15........................................ 1,620
4,500 Maricopa County, Arizona, Pollution Control
Revenue Bonds, Series 94B, 5.95%, 5/01/29....... 4,500
4,600 Maricopa County, Arizona, Public Services, Series
94C, 6.00%, 5/01/29............................. 4,600
1,000 Marshall County, West Virginia, Pollution Control
Revenue Bonds, Mountaineer Carbon Co., 6.00%,
12/01/20........................................ 1,000
6,700 Michigan State Strategic Fund, Consumers Power
Series 88A, 5.95%, 4/15/18...................... 6,700
1,570 Missouri State Health & Educational Facilities
Authority Revenue, Washington University, Series
89A, 6.00%, 3/01/17............................. 1,570
3,700 Monroe County, Georgia, Pollution Control Revenue
Bonds, Georgia Power Co., Series 2, 5.50%,
7/01/25......................................... 3,700
3,900 New York City, New York, Cultural Resources,
5.90%, 12/01/15................................. 3,900
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Municipal Money Market Portfolio
119
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE MUNICIPAL MONEY MARKET PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
$ 2,100 New York City, New York, Water Finance Authority,
Water & Sewer System Revenue Bonds, Series 92C,
5.90%, 6/15/22.................................. $ 2,100
18,400 New York City, New York, Water Finance Authority,
Water & Sewer System Revenue Bonds, Series 94C,
5.90%, 6/15/23.................................. 18,400
2,900 New York State, Energy Research and Development
Authority, Pollution Control Revenue Bonds,
5.95%, 12/01/25................................. 2,900
1,000 Nueces River Authority, Texas, Pollution Control
Revenue Bonds, Series 85, 6.10%, 12/01/99....... 1,000
3,000 Ohio State Air Quality Development Authority
Revenue Bonds, Series 85A, 5.50%, 12/01/15...... 3,000
1,400 Ohio State Air Quality Development Authority
Revenue Bonds, Cincinnati Gas & Electric, Series
B, 5.95%, 9/01/30............................... 1,400
700 Peninsula Ports Authority, Virginia, Coal Revenue
Bonds, 5.95%, 7/01/16........................... 700
4,300 Pennsylvania Higher Education Authority Revenue
Bonds, Carnegie Mellon University, Series 95B,
6.00%, 11/01/27................................. 4,300
3,300 Pennsylvania Higher Education Authority Revenue
Bonds, Carnegie Mellon University, Series 95C,
6.00%, 11/01/29................................. 3,300
3,800 Platte County, Wyoming, Pollution Control Revenue
Bonds, Series A, 6.00%, 7/01/14................. 3,800
1,000 Platte County, Wyoming, Pollution Control Revenue
Bonds, Series B, 6.00%, 7/01/14................. 1,000
2,000 Port of Saint Helens, Oregon, Pollution Control
Revenue Bonds, Portland General Electric Co.,
Series A, 5.95%, 4/01/10........................ 2,000
1,600 Port of Saint Helens, Oregon, Pollution Control
Revenue Bonds, Portland General Electric Co.,
Series B, 5.95%, 6/01/10........................ 1,600
1,400 Saint Charles Parish, Louisiana, Pollution Control
Revenue Bonds, Shell Oil Project, 5.95%,
10/01/22........................................ 1,400
5,000 Salt Lake County, Utah, Pollution Control Revenue
Bonds, British Petroleum Co., 5.95%, 2/01/08.... 5,000
2,700 Salt Lake County, Utah, Pollution Control Revenue
Bonds, SVC Station Holdings, 6.00%, 8/01/07..... 2,700
4,900 Southwest, Texas, Higher Education Authority
Revenue Bonds, Southern Methodist University,
Series 85, 5.95%, 7/01/15....................... 4,900
----------
154,090
----------
WEEKLY VARIABLE RATE BONDS (18.4%)
1,000 Albuquerque, New Mexico, Revenue Bond, Series A,
5.15%, 7/01/22.................................. 1,000
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
$ 1,000 Beaver County, Pennsylvania, Industrial
Development Authority, Duquesne Light Series,
4.95%, 8/01/09.................................. $ 1,000
1,000 Beaver County, Pennsylvania, Industrial
Development Authority, Duquesne Light Series,
4.95%, 8/01/20.................................. 1,000
1,000 Brunswick & Glynn County, Georgia, Development
Authority, Series 85, 5.25%, 12/01/15........... 1,000
7,000 Burke County, Georgia, Development Authority,
Oglethorpe, Series 93A, 5.15%, 1/01/16.......... 7,000
5,800 Charlotte, North Carolina, Airport, Series 93A,
5.15%, 7/01/16.................................. 5,800
1,000 City of Baltimore, Maryland, Pollution Control
Revenue Bonds, General Motors Corp., 5.10%,
2/01/00......................................... 1,000
2,500 City of Columbia, Missouri, Special Revenue Bonds,
Series 88A, 5.15%, 6/01/08...................... 2,500
1,500 City of Columbia, Missouri, Water & Electric
Revenue Bonds, Series 85B, 5.15%, 12/01/15...... 1,500
300 City of Forsyth, Montana, Pollution Control
Revenue Bonds, Series B, 5.00%, 6/01/13......... 300
700 City of Forsyth, Montana, Pollution Control
Revenue Bonds, Series D, 4.90%, 6/01/13......... 700
2,600 City of Midlothian, Texas, Industrial Development
Corp., Pollution Control Revenue Bonds, Box-Crow
Cement Co., 5.80%, 12/01/09..................... 2,600
1,000 City of Minnetonka, Minnesota, Multifamily, Cliffs
Ridgedale, 5.20%, 9/15/25....................... 1,000
1,700 City of San Antonio, Texas, Higher Education
Authority, Trinity University, 5.20%, 4/01/04... 1,700
7,800 Clark County, Nevada, Airport Revenue Bonds,
Series 93A, 5.15%, 7/01/12...................... 7,800
2,700 Clark County, Nevada, Airport Revenue Bonds,
Series 95-A1, 5.05%, 7/01/25.................... 2,700
4,000 Clark County, Nevada, Industrial Development Corp,
Nevada Power Co., Series C, 5.05%, 10/01/30..... 4,000
280 Clear Creek County, Colorado, Revenue Bonds,
Colorado Finance Pool Program, 5.15%, 6/01/98... 280
600 Colorado Student Obligation Bond Authority,
Student Loan Revenue, Series 91C1, 5.05%,
8/01/00......................................... 600
7,200 Dade County, Florida, Water & Sewer Revenue Bonds,
4.90%, 10/05/22................................. 7,200
1,200 Delaware County, Pennsylvania, Industrial
Development Authority, Scott Paper Series D,
5.00%, 12/01/18................................. 1,200
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Municipal Money Market Portfolio
120
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE MUNICIPAL MONEY MARKET PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
$ 500 Delaware County, Pennsylvania, Industrial
Development Authority, Scott Paper Series E,
5.00%, 12/01/18................................. $ 500
3,000 Foothill/Eastern California Toll Road Revenue,
Series 95C, 4.80%, 1/02/35...................... 3,000
5,000 Harris County, Texas, Series 94G, 5.10%,
8/01/20......................................... 5,000
5,000 Harris County, Texas, Series 94H, 5.10%,
8/01/20......................................... 5,000
300 Illinois Development Finance Authority, A.E.
Staley Manufacturing Series 85, 5.05%,
12/01/05........................................ 300
1,000 Lehigh County, Pennsylvania, Allegheny Electric
Cooperative, 5.25%, 12/01/15.................... 1,000
1,500 Louisiana Public Facilities Authority, Hospital
Revenue, Series 85, 6.40%, 12/01/00............. 1,500
1,000 Massachusetts Health & Education Facilities
Authority, Series G-1, 4.75%, 1/01/19........... 1,000
3,900 Nueces County, Texas, Health Facilities, Driscoll
Childrens' Foundation, 5.20%, 7/01/15........... 3,900
1,500 Person County, North Carolina, Carolina Power &
Light, 5.20%, 11/01/19.......................... 1,500
235 Pinellas County, Florida, Health Facilities,
Bayfront Medical Center, Series 89, 4.90%,
6/01/98......................................... 235
450 Polk County, Iowa, Hospital Equipment &
Improvement Authority, 5.15%, 12/01/05 . 450
800 Port Development Corporation Marine Terminal,
Texas, Series 89, 5.05%, 1/15/14................ 800
1,500 Port of Corpus Christi, Texas, Marine Terminal,
R.J. Reynolds Metals Series, 5.25%, 9/01/14..... 1,500
600 Putnam County, Florida, Development Authority,
Seminole Electric Series 84 H1, 4.65%,
3/15/14......................................... 600
1,000 Rapides Parish, Louisiana, Central Louisiana
Electric Series, 5.05%, 7/01/18 . 1,000
700 Sheboygan, Wisconsin, Wisconsin Power & Light
Series, 5.25%, 8/01/14.......................... 700
1,100 University of North Carolina, Chapel Hill Fund
Inc., Certificates of Participation, 5.10%,
10/01/09........................................ 1,100
2,000 Washington Public Power, Series 93-1A3, 4.95%,
7/01/17......................................... 2,000
----------
82,965
----------
TOTAL VARIABLE/FLOATING RATE INSTRUMENTS.................... 237,055
----------
TOTAL TAX-EXEMPT INSTRUMENTS (Cost $435,206).................. 435,206
----------
TAXABLE INSTRUMENT (3.3%)
U.S. GOVERNMENT & AGENCY OBLIGATION (3.3%)
14,820 Federal Home Loan Bank Discount Note, 5.57%,
1/05/96 (Cost $14,811).......................... 14,811
----------
TOTAL INVESTMENTS (99.7%) (Cost $450,017)..................... 450,017
----------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- ------------------------------------------------------------
OTHER ASSETS (0.6%)
Interest Receivable............................. $ 2,563
Other........................................... 29 $ 2,592
----------
LIABILITIES (-0.3%)
Dividends Payable............................... (607)
Investment Advisory Fees Payable................ (338)
Administrative Fees Payable..................... (63)
Custodian Fees Payable.......................... (12)
Payable to Custodian............................ (10)
Director's Fees & Expenses...................... (2)
Other Liabilities............................... (58) (1,090)
---------- ----------
NET ASSETS (100%)............................................. $ 451,519
----------
----------
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 451,502,422 outstanding $.001 par value shares
(authorized 4,000,000,000 shares)........................... $1.00
----------
----------
</TABLE>
- ------------------------------------------------------------
<TABLE>
<S> <C>
BAN -- Bond Anticipation Note
TRANS -- Tax & Revenue Anticipation Notes
</TABLE>
Variable/Floating Rate Instruments. The interest rate changes on these
instruments are based on changes in a designated base rate. These instruments
are payable on demand and are secured by a letter of credit or other support
agreements.
Maturity dates disclosed for Variable/Floating Rate Instruments are the ultimate
maturity dates. The effective maturity dates for such securities are the next
interest reset dates which are seven days or less.
Interest rates disclosed for U.S. Government & Agency Obligations represent
effective yields at December 31, 1995.
At December 31, 1995, approximately 12% of the net assets were invested in Texas
municipal securities. Economic changes affecting the state and certain of it's
public bodies and municipalities may affect the ability of issuers to pay the
required principal and interest payments of the municipal securities.
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Municipal Money Market Portfolio
121
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACTIVE EMERGING
COUNTRY ASIAN MARKETS EUROPEAN
ALLOCATION EQUITY PORTFOLIO EQUITY GLOBAL EQUITY
PORTFOLIO PORTFOLIO YEAR ENDED PORTFOLIO YEAR PORTFOLIO
YEAR ENDED YEAR ENDED DECEMBER ENDED DECEMBER YEAR ENDED
DECEMBER 31, DECEMBER 31, 31, 31, DECEMBER 31,
1995 1995 1995 1995 1995
(000) (000) (000) (000) (000)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends $ 3,730 $ 5,477 $ 19,196 $ 1,146 $ 1,896
Interest 179 711 4,215 245 48
Less: Foreign Taxes Withheld (519) (487) (1,993) (158) (168)
------------- ------------- ----------- ------ -------------
Total Income 3,390 5,701 21,418 1,233 1,776
------------- ------------- ----------- ------ -------------
EXPENSES:
Investment Advisory Fees:
Basic Fees -- Adviser 1,068 2,301 11,563 416 653
Less: Fees Waived (618) (522) -- (130) (109)
------------- ------------- ----------- ------ -------------
Investment Advisory Fees -- Net 450 1,779 11,563 286 544
Administrative Fees 322 458 1,458 100 141
Sub-Administrative Fees 2 -- 173 -- --
Custodian Fees 403 474 2,073 51 44
Filing and Registration Fees 18 23 45 24 16
Insurance 15 21 69 2 4
Directors' Fees and Expenses 7 10 47 3 4
Legal Fees 8 13 39 3 5
Audit Fees 42 46 113 38 42
Shareholder Reports 37 25 81 9 11
Foreign Tax Expense -- 28 202 -- --
Other Expenses 12 28 42 3 5
------------- ------------- ----------- ------ -------------
Total Expenses 1,316 2,905 15,905 519 816
------------- ------------- ----------- ------ -------------
NET INVESTMENT INCOME 2,074 2,796 5,513 714 960
------------- ------------- ----------- ------ -------------
NET REALIZED GAIN (LOSS):
Investments sold 5,468 12,299 (33,253)* 604 5,893
Foreign Currency Transactions (6,591) 160 (981) 39 (86)
------------- ------------- ----------- ------ -------------
Total Net Realized Gain (Loss) (1,123) 12,459 (34,234) 643 5,807
------------- ------------- ----------- ------ -------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION):
Investments 5,557 7,840 (101,142) 3,003 7,313
Foreign Currency Translations 10,118 12 4,125 39 (118)
------------- ------------- ----------- ------ -------------
Total Net Change in Unrealized
Appreciation (Depreciation) 15,675 7,852 (97,017) 3,042 7,195
------------- ------------- ----------- ------ -------------
TOTAL NET REALIZED GAIN (LOSS) AND CHANGE IN
UNREALIZED APPRECIATION (DEPRECIATION) 14,552 20,311 (131,251) 3,685 13,002
------------- ------------- ----------- ------ -------------
Net Increase (Decrease) in Net Assets
Resulting from Operations $ 16,626 $ 23,107 $(125,738) $ 4,399 $ 13,962
------------- ------------- ----------- ------ -------------
------------- ------------- ----------- ------ -------------
</TABLE>
- ---------------
*Net of foreign tax of $650,000 on net realized gains.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
122
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERNATIONAL LATIN AMERICAN
EQUITY INTERNATIONAL JAPANESE PORTFOLIO
GOLD PORTFOLIO PORTFOLIO SMALL CAP EQUITY JANUARY 18,
YEAR ENDED YEAR ENDED PORTFOLIO YEAR PORTFOLIO YEAR 1995* TO
DECEMBER 31, DECEMBER 31, ENDED DECEMBER ENDED DECEMBER DECEMBER 31,
1995 1995 31, 1995 31, 1995 1995
(000) (000) (000) (000) (000)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends $ 84 $ 34,103 $ 5,511 $ 524 $ 263
Interest 92 4,293 549 229 108
Less: Foreign Taxes Withheld (6) (4,270) (630) (78) (19)
------ ------------- ------- ------- -----
Total Income 170 34,126 5,430 675 352
------ ------------- ------- ------- -----
EXPENSES:
Investment Advisory Fees:
Basic Fees -- Adviser 109 11,452 1,796 469 146
Basic Fees -- Sub Adviser 73 -- -- -- --
Less: Fees Waived -- Adviser (55) (424) (181) (118) (146)
Fees Waived -- Sub Adviser (37) -- -- -- --
------ ------------- ------- ------- -----
Investment Advisory Fees -- Net 90 11,028 1,615 351 --
Administrative Fees 35 2,252 309 101 27
Sub-Administrative Fees -- -- -- -- 9
Custodian Fees 19 545 126 38 111
Filing and Registration Fees 18 47 24 35 17
Insurance 1 100 11 4 --
Directors' Fees and Expenses 3 43 7 3 2
Legal Fees 2 57 9 3 5
Audit Fees 37 61 46 37 39
Shareholder Reports 19 99 17 9 11
Foreign Tax Expense -- -- -- -- 45
Other Expenses 3 81 10 4 4
------ ------------- ------- ------- -----
Total Expenses 227 14,313 2,174 585 270
------ ------------- ------- ------- -----
NET INVESTMENT INCOME (LOSS) (57) 19,813 3,256 90 82
------ ------------- ------- ------- -----
NET REALIZED GAIN (LOSS):
Investments Sold 880 108,572 7,974 (2,999) (530)
Foreign Currency Transactions (4) (20,102) (297) -- (13)
------ ------------- ------- ------- -----
Total Net Realized Gain (Loss) 876 88,470 7,677 (2,999) (543)
------ ------------- ------- ------- -----
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION):
Investments Sold 2,423 44,604 (6,040) 2,624 208
Foreign Currency Translations -- 6,374 (771) 3,310 --
------ ------------- ------- ------- -----
Total Net Change in Unrealized
Appreciation (Depreciation) 2,423 50,978 (6,811) 5,934 208
------ ------------- ------- ------- -----
TOTAL NET REALIZED GAIN (LOSS) AND CHANGE IN
UNREALIZED
APPRECIATION (DEPRECIATION) 3,299 139,448 866 2,935 (335)
------ ------------- ------- ------- -----
Net Increase (Decrease) in Net Assets
Resulting from Operations $ 3,242 $ 159,261 $ 4,122 $ 3,025 $ (253)
------ ------------- ------- ------- -----
------ ------------- ------- ------- -----
</TABLE>
- ---------------
*Commencement of operations.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
123
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AGGRESSIVE SMALL CAP U.S. REAL
EQUITY EMERGING EQUITY VALUE ESTATE VALUE
PORTFOLIO GROWTH GROWTH EQUITY PORTFOLIO EQUITY BALANCED
MARCH 8, PORTFOLIO PORTFOLIO PORTFOLIO FEBRUARY PORTFOLIO PORTFOLIO
1995* TO YEAR ENDED YEAR ENDED YEAR ENDED 24, 1995* YEAR ENDED YEAR ENDED
DECEMBER DECEMBER DECEMBER DECEMBER TO DECEMBER DECEMBER DECEMBER
31, 1995 31, 1995 31, 1995 31, 1995 31, 1995 31, 1995 31, 1995
(000) (000) (000) (000) (000) (000) (000)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends $ 338 $ 203 $ 2,580 $ 1,575 $ 1,796 $ 3,986 $ 374
Interest 88 445 694 118 103 245 642
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total Income 426 648 3,274 1,693 1,899 4,231 1,016
----------- ----------- ----------- ----------- ----------- ----------- -----------
EXPENSES:
Investment Advisory Fees:
Basic Fees -- Adviser 128 1,325 830 400 299 570 106
Less: Fees Waived (96) (18) (105) (97) (129) (85) (68)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Investment Advisory
Fees -- Net 32 1,307 725 303 170 485 38
Administrative Fees 28 214 223 82 61 183 42
Custodian Fees 19 29 46 19 36 30 12
Filing and Registration Fees 18 22 23 14 29 27 13
Insurance 1 9 8 3 1 7 2
Directors' Fees and Expenses 2 6 6 4 2 5 3
Legal Fees 24 6 6 3 25 5 2
Audit Fees 22 27 32 25 22 27 25
Shareholder Reports 12 28 28 13 25 21 8
Other Expenses 2 9 8 4 2 7 3
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total Expenses 160 1,657 1,105 470 373 797 148
----------- ----------- ----------- ----------- ----------- ----------- -----------
NET INVESTMENT INCOME (LOSS) 266 (1,009) 2,169 1,223 1,526 3,434 868
----------- ----------- ----------- ----------- ----------- ----------- -----------
NET REALIZED GAIN (LOSS):
Investments Sold 4,082 11,225 32,477 1,546 3,495 10,276 1,158
Written Options (22) -- -- -- -- -- --
Securities Sold Short (19) -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total Net Realized Gain 4,041 11,225 32,477 1,546 3,495 10,276 1,158
----------- ----------- ----------- ----------- ----------- ----------- -----------
CHANGE IN UNREALIZED
APPRECIATION (DEPRECIATION) 1,860 27,942 15,685 5,880 3,896 17,116 2,413
----------- ----------- ----------- ----------- ----------- ----------- -----------
TOTAL NET REALIZED GAIN AND
CHANGE IN UNREALIZED
APPRECIATION (DEPRECIATION) 5,901 39,167 48,162 7,426 7,391 27,392 3,571
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net Increase in Net Assets
Resulting from Operations $ 6,167 $ 38,158 $ 50,331 $ 8,649 $ 8,917 $ 30,826 $ 4,439
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
- ---------------
*Commencement of operations.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
124
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EMERGING GLOBAL MUNICIPAL MUNICIPAL
MARKETS FIXED FIXED BOND MONEY MONEY
DEBT INCOME INCOME HIGH YIELD PORTFOLIO MARKET MARKET
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO JANUARY 18, PORTFOLIO PORTFOLIO
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED 1995* TO YEAR ENDED YEAR ENDED
DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER
31, 1995 31, 1995 31, 1995 31, 1995 31, 1995 31, 1995 31, 1995
(000) (000) (000) (000) (000) (000) (000)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends $ -- $ -- $ -- $ 53 $ -- $ -- $ --
Interest 28,018 13,011 6,987 7,927 2,154 48,910 15,686
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total Income 28,018 13,011 6,987 7,980 2,154 48,910 15,686
----------- ----------- ----------- ----------- ----------- ----------- -----------
EXPENSES:
Investment Advisory Fees:
Basic Fees -- Adviser 1,702 624 383 335 149 2,500 1,210
Less: Fees Waived -- (247) (204) (55) (119) -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Investment Advisory
Fees -- Net 1,702 377 179 280 30 2,500 1,210
Administrative Fees 275 288 157 118 72 1,307 635
Custodian Fees 204 27 46 20 9 119 72
Filing and Registration Fees 18 17 19 18 23 58 54
Insurance 10 14 9 7 1 67 31
Interest Expense 616 -- -- -- -- -- --
Directors' Fees and Expenses 25 7 5 4 3 29 14
Legal Fees 9 8 5 4 14 25 13
Audit Fees 72 26 35 32 22 23 27
Shareholder Reports 23 18 15 13 14 57 26
Other Expenses 44 21 9 7 3 68 25
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total Expenses 2,998 803 479 503 191 4,253 2,107
----------- ----------- ----------- ----------- ----------- ----------- -----------
NET INVESTMENT INCOME 25,020 12,208 6,508 7,477 1,963 44,657 13,579
----------- ----------- ----------- ----------- ----------- ----------- -----------
NET REALIZED GAIN (LOSS):
Investments Sold 9,470 5,823 1,542 (3,145) 193 79 (1)
Foreign Currency
Transactions (2,072) 98 (1,527) -- -- -- --
Securities Sold Short 1,116 -- -- -- -- -- --
Written Options 673 -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total Net Realized Gain
(Loss) 9,187 5,921 15 (3,145) 193 79 (1)
----------- ----------- ----------- ----------- ----------- ----------- -----------
CHANGE IN UNREALIZED
APPRECIATION (DEPRECIATION):
Investments Sold 15,093 12,945 9,810 9,886 1,635 -- --
Foreign Currency
Translations 197 180 381 -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total Net Change in
Unrealized
Appreciation
(Depreciation) 15,290 13,125 10,191 9,886 1,635 -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
TOTAL NET REALIZED GAIN (LOSS)
AND CHANGE IN UNREALIZED
APPRECIATION (DEPRECIATION) 24,477 19,046 10,206 6,741 1,828 79 (1)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net Increase in Net Assets
Resulting from Operations $ 49,497 $ 31,254 $ 16,714 $ 14,218 $ 3,791 $ 44,736 $ 13,578
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
- ---------------
*Commencement of operations.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
125
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
THE ACTIVE COUNTRY ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1994 1995
(000) (000)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 2,652 $ 2,074
Net Realized Gain (Loss) 8,147 (1,123)
Change in Unrealized Appreciation (Depreciation) (12,455) 15,675
-------------- --------------
Net Increase (Decrease) in Net Assets Resulting from
Operations (1,656) 16,626
-------------- --------------
DISTRIBUTIONS:
Net Investment Income (1,773) (3,492)
In Excess of Net Investment Income - (1,308)
Net Realized Gain (4,419) (12,502)
-------------- --------------
Total Distributions (6,192) (17,302)
-------------- --------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 169,994 88,081
Distributions Reinvested 5,395 15,283
Redeemed (135,418) (115,002)
-------------- --------------
Net Increase (Decrease) from Capital Share Transactions 39,971 (11,638)
-------------- --------------
Total Increase (Decrease) in Net Assets 32,123 (12,314)
NET ASSETS:
Beginning of Period 150,854 182,977
-------------- --------------
End of Period (2) $ 182,977 $ 170,663
-------------- --------------
-------------- --------------
<FN>
- --------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 14,259 7,883
Shares Issued on Distributions Reinvested 458 1,346
Shares Redeemed (11,357) (10,268)
-------------- --------------
Net Increase (Decrease) in Capital Shares Outstanding 3,360 (1,039)
-------------- --------------
-------------- --------------
(2) Net Assets were comprised of:
Paid in Capital $ 168,882 $ 157,244
Undistributed (Distributions in Excess of) Net Investment
Income 1,418 (7,782)
Accumulated Net Realized Gain 7,989 838
Unrealized Appreciation (Net of accrual for foreign tax of
$4 on unrealized appreciation on investments at December
31, 1995) 4,688 20,363
-------------- --------------
$ 182,977 $ 170,663
-------------- --------------
-------------- --------------
</TABLE>
- --------------------------------------------------------------------------------
THE ASIAN EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1994 1995
(000) (000)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 1,397 $ 2,796
Net Realized Gain 32,848 12,459
Change in Unrealized Appreciation (Depreciation) (80,975) 7,852
-------------- --------------
Net Increase (Decrease) in Net Assets Resulting from
Operations (46,730) 23,107
-------------- --------------
DISTRIBUTIONS:
Net Investment Income (972) (4,866)
In Excess of Net Investment Income -- (3)
Net Realized Gain (5,840) (40,469)
-------------- --------------
Total Distributions (6,812) (45,338)
-------------- --------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 213,200 472,587
Distributions Reinvested 6,036 41,003
Redeemed (175,924) (453,381)
-------------- --------------
Net Increase from Capital Share Transactions 43,312 60,209
-------------- --------------
Total Increase (Decrease) in Net Assets (10,230) 37,978
NET ASSETS:
Beginning of Period 287,136 276,906
-------------- --------------
End of Period (2) $ 276,906 $ 314,884
-------------- --------------
-------------- --------------
<FN>
- --------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 9,345 24,613
Shares Issued on Distributions Reinvested 233 2,138
Shares Redeemed (7,685) (23,439)
-------------- --------------
Net Increase in Capital Shares Outstanding 1,893 3,312
-------------- --------------
-------------- --------------
(2) Net Assets were Comprised of:
Paid in Capital $ 207,594 $ 268,221
Undistributed (Distributions in Excess of) Net Investment
Income 1,886 (3)
Accumulated Net Realized Gain 32,350 3,738
Unrealized Appreciation 35,076 42,928
-------------- --------------
$ 276,906 $ 314,884
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
126
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
THE EMERGING MARKETS PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1994 1995
(000) (000)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income (Loss) $ (2,302) $ 5,513
Net Realized Gain (Loss) 66,824 (34,234)
Change in Unrealized Appreciation (Depreciation) (168,042) (97,017)
-------------- --------------
Net Decrease in Net Assets Resulting from Operations (103,520) (125,738)
-------------- --------------
DISTRIBUTIONS:
Net Investment Income -- (3,978)
Net Realized Gain (37,393) (66,711)
-------------- --------------
Total Distributions (37,393) (70,689)
-------------- --------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 579,390 379,789
Distributions Reinvested 35,730 67,401
Redeemed (279,921) (303,810)
-------------- --------------
Net Increase from Capital Share Transactions 335,199 143,380
-------------- --------------
Total Increase (Decrease) in Net Assets 194,286 (53,047)
NET ASSETS:
Beginning of Period 735,352 929,638
-------------- --------------
End of Period (2) $ 929,638 $ 876,591
-------------- --------------
-------------- --------------
<FN>
- --------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 32,685 27,709
Shares Issued on Distributions Reinvested 1,974 4,586
Shares Redeemed (16,342) (22,595)
-------------- --------------
Net Increase in Capital Shares Outstanding 18,317 9,700
-------------- --------------
-------------- --------------
(2) Net Assets were comprised of:
Paid in Capital $ 818,267 $ 962,160
Accumulated Net Investment Loss/Undistributed Net
Investment Income (785) 167
Accumulated Net Realized Gain (Loss) 65,253 (35,622)
Unrealized Appreciation (Depreciation) (Net of accrual for
India tax of $4,779 and $308, respectively on unrealized
appreciation on investments.) 46,903 (50,114)
-------------- --------------
$ 929,638 $ 876,591
-------------- --------------
-------------- --------------
</TABLE>
- --------------------------------------------------------------------------------
THE EUROPEAN EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1994 1995
(000) (000)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSSETS
OPERATIONS:
Net Investment Income $ 159 $ 714
Net Realized Gain 2,606 643
Change in Unrealized Appreciation (Depreciation) (1,886) 3,042
-------------- --------------
Net Increase in Net Assets Resulting from Operations 879 4,399
-------------- --------------
DISTRIBUTIONS:
Net Investment Income (87) (738)
Net Realized Gain (251) (3,017)
-------------- --------------
Total Distributions (338) (3,755)
-------------- --------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 39,425 56,209
Distributions Reinvested 337 3,468
Redeemed (25,350) (18,372)
-------------- --------------
Net Increase from Capital Share Transactions 14,412 41,305
-------------- --------------
Total Increase in Net Assets 14,953 41,949
NET ASSETS:
Beginning of Period 12,681 27,634
-------------- --------------
End of Period (2) $ 27,634 $ 69,583
-------------- --------------
-------------- --------------
<FN>
- --------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 2,791 4,104
Shares Issued on Distributions Reinvested 27 264
Shares Redeemed (1,818) (1,350)
-------------- --------------
Net Increase in Capital Shares Outstanding 1,000 3,018
-------------- --------------
-------------- --------------
(2) Net Assets were comprised of:
Paid in Capital $ 25,071 $ 66,433
Undistributed Net Investment Income 31 24
Accumulated Net Realized Gain 2,731 283
Unrealized Appreciation (Depreciation) (199) 2,843
-------------- --------------
$ 27,634 $ 69,583
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
127
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
THE GLOBAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1994 1995
(000) (000)
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 450 $ 960
Net Realized Gain 1,493 5,807
Change in Unrealized Appreciation (Depreciation) (1,816) 7,195
-------------- --------------
Net Increase in Net Assets Resulting from Operations 127 13,962
-------------- --------------
DISTRIBUTIONS:
Net Investment Income (170) (1,202)
Net Realized Gain (1,756) (7,032)
-------------- --------------
Total Distributions (1,926) (8,234)
-------------- --------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 72,166 30,429
Distributions Reinvested 1,926 8,198
Redeemed (13,276) (31,615)
-------------- --------------
Net Increase from Capital Share Transactions 60,816 7,012
-------------- --------------
Total Increase in Net Assets 59,017 12,740
NET ASSETS:
Beginning of Period 19,918 78,935
-------------- --------------
End of Period (2) $ 78,935 $ 91,675
-------------- --------------
-------------- --------------
<FN>
- ------------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 5,281 2,175
Shares Issued on Distributions Reinvested 154 583
Shares Redeemed (982) (2,239)
-------------- --------------
Net Increase in Capital Shares Outstanding 4,453 519
-------------- --------------
-------------- --------------
(2) Net Assets were comprised of:
Paid in Capital $ 75,435 $ 82,447
Undistributed Net Investment Income 373 --
Accumulated Net Realized Gain 1,568 474
Unrealized Appreciation 1,559 8,754
-------------- --------------
$ 78,935 $ 91,675
-------------- --------------
-------------- --------------
</TABLE>
- --------------------------------------------------------------------------------
THE GOLD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 1, 1994* YEAR ENDED
TO DECEMBER 31, DECEMBER 31,
1994 1995
(000) (000)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income (Loss) $ 77 $ (57)
Net Realized Gain 971 876
Change in Unrealized Appreciation (Depreciation) (2,809) 2,423
------- --------------
Net Increase (Decrease) in Net Assets Resulting from
Operations (1,761) 3,242
------- --------------
DISTRIBUTIONS:
Net Investment Income (38) (37)
Net Realized Gain -- (2,066)
------- --------------
Total Distributions (38) (2,103)
------- --------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 40,892 21,820
Distributions Reinvested 32 1,913
Redeemed (8,882) (47,706)
------- --------------
Net Increase (Decrease) from Capital Share Transactions 32,042 (23,973)
------- --------------
Total Increase (Decrease) in Net Assets 30,243 (22,834)
NET ASSETS:
Beginning of Period -- 30,243
------- --------------
End of Period (2) $ 30,243 $ 7,409
------- --------------
------- --------------
<FN>
- --------------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 4,264 2,403
Shares Issued on Distributions Reinvested 3 222
Shares Redeemed (954) (5,071)
------- --------------
Net Increase (Decrease) in Capital Shares Outstanding 3,313 (2,446)
------- --------------
------- --------------
(2) Net Assets were comprised of:
Paid in Capital $ 32,042 $ 7,817
Undistributed Net Investment Income 36 --
Accumulated Net Realized Gain (Loss) 974 (22)
Unrealized Depreciation (2,809) (386)
------- --------------
$ 30,243 $ 7,409
------- --------------
------- --------------
- -----------------
*Commencement of operations.
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
128
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
THE INTERNATIONAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1994 1995
(000) (000)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 13,406 $ 19,813
Net Realized Gain 64,532 88,470
Change in Unrealized Appreciation (Depreciation) 46,399 50,978
------------ ------------
Net Increase in Net Assets Resulting from Operations 124,337 159,261
------------ ------------
DISTRIBUTIONS:
Net Investment Income (11,956) (5,969)
Net Realized Gain (18,019) (168,582)
------------ ------------
Total Distributions (29,975) (174,551)
------------ ------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 330,843 276,622
Distributions Reinvested 25,762 167,795
Redeemed (93,242) (135,367)
------------ ------------
Net Increase from Capital Share Transactions 263,363 309,050
------------ ------------
Total Increase in Net Assets 357,725 293,760
NET ASSETS:
Beginning of Period 947,045 1,304,770
------------ ------------
End of Period (2) $ 1,304,770 $ 1,598,530
------------ ------------
------------ ------------
<FN>
- --------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 22,148 18,165
Shares issued on Distributions Reinvested 1,872 11,272
Shares Redeemed (6,156) (8,961)
------------ ------------
Net Increase in Capital Shares Outstanding 17,864 20,476
------------ ------------
------------ ------------
(2) Net Assets were Comprised of:
Paid in Capital $ 1,001,514 $ 1,310,630
Undistributed Net Investment Income 7,083 13,219
Accumulated Net Realized Gain (Loss) 70,335 (2,135)
Unrealized Appreciation 225,838 276,816
------------ ------------
$ 1,304,770 $ 1,598,530
------------ ------------
------------ ------------
</TABLE>
- --------------------------------------------------------------------------------
THE INTERNATIONAL SMALL CAP PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1994 1995
(000) (000)
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 1,413 $ 3,256
Net Realized Gain (Loss) (2,342) 7,677
Change in Unrealized Appreciation (Depreciation) (5,180) (6,811)
-------------- --------------
Net Increase (Decrease) in Net Assets Resulting from
Operations (6,109) 4,122
-------------- --------------
DISTRIBUTIONS:
Net Investment Income (96) (2,947)
Net Realized Gain (794) (4,763)
-------------- --------------
Total Distributions (890) (7,710)
-------------- --------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 132,287 59,699
Distributions Reinvested 763 6,777
Redeemed (18,784) (24,320)
-------------- --------------
Net Increase from Capital Share Transactions 114,266 42,156
-------------- --------------
Total Increase in Net Assets 107,267 38,568
NET ASSETS:
Beginning of Period 52,834 160,101
-------------- --------------
End of Period (2) $ 160,101 $ 198,669
-------------- --------------
-------------- --------------
<FN>
- ------------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 8,068 3,865
Shares Issued on Distributions Reinvested 52 453
Shares Redeemed (1,164) (1,584)
-------------- --------------
Net Increase in Capital Shares Outstanding 6,956 2,734
-------------- --------------
-------------- --------------
(2) Net Assets were comprised of:
Paid in Capital $ 162,928 $ 205,084
Undistributed Net Investment Income 703 715
Accumulated Net Realized Gain (Loss) (1,989) 1,222
Unrealized Depreciation (1,541) (8,352)
-------------- --------------
$ 160,101 $ 198,669
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
129
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
THE JAPANESE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 25,
1994* TO YEAR ENDED
DECEMBER 31, DECEMBER 31,
1994 1995
(000) (000)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income (Loss) $ (31) $ 90
Net Realized Loss (527) (2,999)
Change in Unrealized Appreciation (Depreciation) (215) 5,934
-------------- --------------
Net Increase (Decrease) in Net Assets Resulting from Operations (773) 3,025
-------------- --------------
DISTRIBUTIONS:
In Excess of Net Investment Income -- (2,539)
-------------- --------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 69,015 132,973
Distributions Reinvested -- 2,277
Redeemed (17,910) (66,790)
-------------- --------------
Net Increase from Capital Share Transactions 51,105 68,460
-------------- --------------
Total Increase in Net Assets 50,332 68,946
NET ASSETS:
Beginning of Period -- 50,332
-------------- --------------
End of Period (2) $ 50,332 $ 119,278
-------------- --------------
-------------- --------------
<FN>
- -------------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 6,910 15,121
Shares Issued on Distributions Reinvested -- 245
Shares Redeemed (1,789) (7,618)
-------------- --------------
Net Increase in Capital Shares Outstanding 5,121 7,748
-------------- --------------
-------------- --------------
(2) Net Assets were comprised of:
Paid in Capital $ 50,808 $ 119,268
Accumulated Net Investment Loss/Distributions in Excess of Net
Investment Income (261) (2,710)
Accumulated Net Realized Loss -- (2,999)
Unrealized Appreciation (Depreciation) (215) 5,719
-------------- --------------
$ 50,332 $ 119,278
-------------- --------------
-------------- --------------
- -----------------
* Commencement of operations
</TABLE>
- --------------------------------------------------------------------------------
THE LATIN AMERICAN PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 18,
1995*
TO DECEMBER 31,
1995
(000)
- -------------------------------------------------------------------------------------------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 82
Net Realized Loss (543)
Change in Unrealized Appreciation 208
-------
Net Decrease in Net Assets Resulting from Operations (253)
-------
DISTRIBUTIONS:
Net Investment Income (74)
Return of Capital (49)
-------
Total Distributions (123)
-------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 21,860
Distributions Reinvested 108
Redeemed (6,216)
-------
Net Increase from Capital Share Transactions 15,752
-------
Total Increase in Net Assets 15,376
NET ASSETS:
Beginning of Period --
-------
End of Period (2) $ 15,376
-------
-------
<FN>
- -------------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 2,375
Shares Issued on Distributions Reinvested 12
Shares Redeemed (690)
-------
Net Increase in Capital Shares Outstanding 1,697
-------
-------
(2) Net Assets were comprised of:
Paid in Capital $ 15,698
Accumulated Net Realized Loss (530)
Unrealized Appreciation 208
-------
$ 15,376
-------
-------
- -----------------
*Commencement of operations
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
130
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
THE AGGRESSIVE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 8, 1995*
TO DECEMBER 31,
1995
(000)
- ------------------------------------------------------------------------------------------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 266
Net Realized Gain 4,041
Change in Unrealized Appreciation 1,860
-------
Net Increase in Net Assets Resulting from Operations 6,167
-------
DISTRIBUTIONS:
Net Investment Income (268)
Net Realized Gain (3,617)
-------
Total Distributions (3,885)
-------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 26,611
Distributions Reinvested 3,556
Redeemed (3,901)
-------
Net Increase from Capital Share Transactions 26,266
-------
Total Increase in Net Assets 28,548
NET ASSETS:
Beginning of Period --
-------
End of Period (2) $ 28,548
-------
-------
<FN>
- ------------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 2,360
Shares Issued on Distributions Reinvested 293
Shares Redeemed (308)
-------
Net Increase in Capital Shares Outstanding 2,345
-------
-------
(2) Net Assets were comprised of:
Paid in Capital $ 26,266
Accumulated Net Realized Gain 422
Unrealized Appreciation 1,860
-------
$ 28,548
-------
-------
- -----------------
*Commencement of operations.
</TABLE>
- --------------------------------------------------------------------------------
THE EMERGING GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1994 1995
(000) (000)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Loss $ (673) $ (1,009)
Net Realized Gain 1,331 11,225
Change in Unrealized Appreciation (Depreciation) (891) 27,942
-------------- --------------
Net Increase (Decrease) in Net Assets Resulting from Operations (233) 38,158
-------------- --------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 85,970 100,167
Redeemed (71,689) (136,616)
-------------- --------------
Net Increase (Decrease) from Capital Share Transactions 14,281 (36,449)
-------------- --------------
Total Increase in Net Assets 14,048 1,709
NET ASSETS:
Beginning of Period 103,621 117,669
-------------- --------------
End of Period (2) $ 117,669 $ 119,378
-------------- --------------
-------------- --------------
<FN>
- -------------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 5,433 5,737
Shares Redeemed (4,522) (7,483)
-------------- --------------
Net Increase (Decrease) in Capital Shares Outstanding 911 (1,746)
-------------- --------------
-------------- --------------
(2) Net Assets were comprised of:
Paid in Capital $ 103,598 $ 66,140
Accumulated Net Realized Gain (Loss) (10,925) 300
Unrealized Appreciation 24,996 52,938
-------------- --------------
$ 117,669 $ 119,378
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
131
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
THE EQUITY GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1994 1995
(000) (000)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSSETS
OPERATIONS:
Net Investment Income $ 1,293 $ 2,169
Net Realized Gain 3,710 32,477
Change in Unrealized Appreciation (Depreciation) (2,690) 15,685
-------------- --------------
Net Increase in Net Assets Resulting from Operations 2,313 50,331
-------------- --------------
DISTRIBUTIONS:
Net Investment Income (952) (2,636)
Net Realized Gain (2,220) (26,092)
-------------- --------------
Total Distributions (3,172) (28,728)
-------------- --------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 47,456 78,470
Distributions Reinvested 3,096 26,785
Redeemed (26,223) (66,005)
-------------- --------------
Net Increase from Capital Share Transactions 24,329 39,250
-------------- --------------
Total Increase in Net Assets 23,470 60,853
NET ASSETS:
Beginning of Period 73,789 97,259
-------------- --------------
End of Period (2) $ 97,259 $ 158,112
-------------- --------------
-------------- --------------
<FN>
- --------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 3,964 5,794
Shares Issued on Distributions Reinvested 267 1,955
Shares Redeemed (2,218) (4,657)
-------------- --------------
Net Increase in Capital Shares Outstanding 2,013 3,092
-------------- --------------
-------------- --------------
(2) Net Assets were comprised of:
Paid in Capital $ 92,584 $ 131,834
Undistributed Net Investment Income 461 --
Accumulated Net Realized Gain 3,459 9,838
Unrealized Appreciation 755 16,440
-------------- --------------
$ 97,259 $ 158,112
-------------- --------------
-------------- --------------
</TABLE>
- --------------------------------------------------------------------------------
THE SMALL CAP VALUE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER DECEMBER 31,
31, 1994 1995
(000) (000)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSSETS
OPERATIONS:
Net Investment Income $ 951 $ 1,223
Net Realized Gain 1,484 1,546
Change in Unrealized Appreciation (Depreciation) (1,598) 5,880
----------- --------------
Net Increase in Net Assets Resulting from Operations 837 8,649
----------- --------------
DISTRIBUTIONS:
Net Investment Income (831) (1,519)
Net Realized Gain (720) (2,511)
----------- --------------
Total Distributions (1,551) (4,030)
----------- --------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 25,447 18,293
Distributions Reinvested 1,464 3,611
Redeemed (12,939) (14,637)
----------- --------------
Net Increase from Capital Share Transactions 13,972 7,267
----------- --------------
Total Increase in Net Assets 13,258 11,886
NET ASSETS:
Beginning of Period 26,775 40,033
----------- --------------
End of Period (2) $ 40,033 $ 51,919
----------- --------------
----------- --------------
<FN>
- -------------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 2,358 1,631
Shares Issued on Distributions Reinvested 137 324
Shares Redeemed (1,200) (1,304)
----------- --------------
Net Increase in Capital Shares Outstanding 1,295 651
----------- --------------
----------- --------------
(2) Net Assets were comprised of:
Paid in Capital $ 39,194 $ 46,460
Undistributed Net Investment Income 281 --
Accumulated Net Realized Gain 1,484 505
Unrealized Appreciation (Depreciation) (926) 4,954
----------- --------------
$ 40,033 $ 51,919
----------- --------------
----------- --------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
132
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
THE U.S. REAL ESTATE PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 24,
1995* TO
DECEMBER 31, 1995
(000)
- -------------------------------------------------------------------------------------------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 1,526
Net Realized Gain 3,495
Change in Unrealized Appreciation 3,896
-------
Net Increase in Net Assets Resulting from Operations 8,917
-------
DISTRIBUTIONS:
Net Investment Income (1,405)
Net Realized Gain (2,504)
-------
Total Distributions (3,909)
-------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 67,651
Distributions Reinvested 3,148
Redeemed (6,298)
-------
Net Increase from Capital Share Transactions 64,501
-------
Total Increase in Net Assets 69,509
NET ASSETS:
Beginning of Period --
-------
End of Period (2) $ 69,509
-------
-------
<FN>
- -------------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 6,381
Shares Issued on Distributions Reinvested 279
Shares Redeemed (573)
-------
Net Increase in Capital Shares Outstanding 6,087
-------
-------
(2) Net Assets were comprised of:
Paid in Capital $ 64,501
Undistributed Net Investment Income 121
Accumulated Net Realized Gain 991
Unrealized Appreciation 3,896
-------
$ 69,509
-------
-------
- -----------------
*Commencement of operations
</TABLE>
- --------------------------------------------------------------------------------
THE VALUE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1994 1995
(000) (000)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSSETS
OPERATIONS:
Net Investment Income $ 2,376 $ 3,434
Net Realized Gain 2,378 10,276
Change in Unrealized Appreciation (Depreciation) (6,089) 17,116
-------------- --------------
Net Increase (Decrease) in Net Assets Resulting from Operations (1,335) 30,826
-------------- --------------
DISTRIBUTIONS:
Net Investment Income (2,189) (4,042)
Net Realized Gain (2,504) (6,330)
-------------- --------------
Total Distributions (4,693) (10,372)
-------------- --------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 45,372 70,393
Distributions Reinvested 4,395 9,289
Redeemed (24,931) (26,177)
-------------- --------------
Net Increase from Capital Share Transactions 24,836 53,505
-------------- --------------
Total Increase in Net Assets 18,808 73,959
NET ASSETS:
Beginning of Period 54,598 73,406
-------------- --------------
End of Period (2) $ 73,406 $ 147,365
-------------- --------------
-------------- --------------
<FN>
- ---------------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 3,798 5,522
Shares Issued on Distributions Reinvested 372 731
Shares Redeemed (2,109) (2,068)
-------------- --------------
Net Increase in Capital Shares Outstanding 2,061 4,185
-------------- --------------
-------------- --------------
(2) Net Assets were comprised of:
Paid in Capital $ 72,751 $ 126,256
Undistributed Net Investment Income 643 8
Accumulated Net Realized Gain 2,307 6,280
Unrealized Appreciation (Depreciation) (2,295) 14,821
-------------- --------------
$ 73,406 $ 147,365
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
133
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
THE BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1994 1995
(000) (000)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 987 $ 868
Net Realized Gain 496 1,158
Change in Unrealized Appreciation (Depreciation) (1,998) 2,413
-------------- -------
Net Increase (Decrease) in Net Assets Resulting from Operations (515) 4,439
-------------- -------
DISTRIBUTIONS:
Net Investment Income (1,257) (1,080)
Net Realized Gain (3,880) (1,047)
-------------- -------
Total Distributions (5,137) (2,127)
-------------- -------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 4,396 3,530
Distributions Reinvested 4,725 1,695
Redeemed (14,661) (3,387)
-------------- -------
Net Increase (Decrease) from Capital Share Transactions (5,540) 1,838
-------------- -------
Total Increase (Decrease) in Net Assets (11,192) 4,150
NET ASSETS:
Beginning of Period 29,684 18,492
-------------- -------
End of Period (2) $ 18,492 $ 22,642
-------------- -------
-------------- -------
<FN>
- --------------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 470 380
Shares Issued on Distributions Reinvested 502 182
Shares Redeemed (1,574) (358)
-------------- -------
Net Increase (Decrease) in Capital Shares Outstanding (602) 204
-------------- -------
-------------- -------
(2) Net Assets were comprised of:
Paid in Capital $ 18,279 $ 20,117
Undistributed Net Investment Income 214 2
Accumulated Net Realized Gain 495 606
Unrealized Appreciation (Depreciation) (496) 1,917
-------------- -------
$ 18,492 $ 22,642
-------------- -------
-------------- -------
</TABLE>
- --------------------------------------------------------------------------------
THE EMERGING MARKETS DEBT PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 1,
1994* YEAR ENDED
TO DECEMBER 31, DECEMBER 31,
1994 1995
(000) (000)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 8,511 $ 25,020
Net Realized Gain (Loss) (2,516) 9,187
Change in Unrealized Appreciation (Depreciation) (9,457) 15,290
-------- --------------
Net Increase (Decrease) in Net Assets Resulting from
Operations (3,462) 49,497
-------- --------------
DISTRIBUTIONS:
Net Investment Income -- (33,418)
Net Realized Gain -- (7,508)
-------- --------------
Total Distributions -- (40,926)
-------- --------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 190,661 147,278
Distributions Reinvested -- 29,155
Redeemed (42,250) (148,075)
-------- --------------
Net Increase from Capital Share Transactions 148,411 28,358
-------- --------------
Total Increase in Net Assets 144,949 36,929
NET ASSETS:
Beginning of Period -- 144,949
-------- --------------
End of Period (2) $ 144,949 $ 181,878
-------- --------------
-------- --------------
<FN>
- -------------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 21,753 18,475
Shares issued on Distributions Reinvested -- 3,468
Shares Redeemed (4,872) (17,651)
-------- --------------
Net Increase in Capital Shares Outstanding 16,881 4,292
-------- --------------
-------- --------------
(2) Net Assets were comprised of:
Paid in Capital $ 148,411 $ 176,769
Undistributed (Distributions in Excess of) Net Investment
Income 8,322 (1,501)
Accumulated Net Realized Gain (Loss) (2,327) 777
Unrealized Appreciation (Depreciation) (9,457) 5,833
-------- --------------
$ 144,949 $ 181,878
-------- --------------
-------- --------------
- -----------------
* Commencement of operations.
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
134
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
THE FIXED INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1994 1995
(000) (000)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 12,421 $ 12,208
Net Realized Gain (Loss) (14,879) 5,921
Change in Unrealized Appreciation (Depreciation) (5,219) 13,125
-------------- --------------
Net Increase (Decrease) in Net Assets Resulting from Operations (7,677) 31,254
-------------- --------------
DISTRIBUTIONS:
Net Investment Income (11,181) (13,570)
Net Realized Gain (8,092) --
In Excess of Net Realized Gain (22) --
-------------- --------------
Total Distributions (19,295) (13,570)
-------------- --------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 91,618 67,883
Distributions Reinvested 16,756 10,529
Redeemed (112,739) (139,900)
-------------- --------------
Net Decrease from Capital Share Transactions (4,365) (61,488)
-------------- --------------
Total Decrease in Net Assets (31,337) (43,804)
NET ASSETS:
Beginning of Period 240,668 209,331
-------------- --------------
End of Period (2) $ 209,331 $ 165,527
-------------- --------------
-------------- --------------
<FN>
- -------------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscriptions 9,049 6,668
Shares Issued on Distributions Reinvested 1,625 1,022
Shares Redeemed (11,150) (13,696)
-------------- --------------
Net Decrease in Capital Shares Outstanding (476) (6,006)
-------------- --------------
-------------- --------------
(2) Net Assets were comprised of:
Paid in Capital $ 227,051 $ 165,563
Undistributed Net Investment Income 1,274 10
Accumulated Net Realized Loss (14,154) (8,331)
Unrealized Appreciation (Depreciation) (4,840) 8,285
-------------- --------------
$ 209,331 $ 165,527
-------------- --------------
-------------- --------------
</TABLE>
- --------------------------------------------------------------------------------
THE GLOBAL FIXED INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1994 1995
(000) (000)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 9,291 $ 6,508
Net Realized Gain (Loss) (9,075) 15
Change in Unrealized Appreciation (Depreciation) (10,682) 10,191
-------------- --------------
Net Increase (Decrease) in Net Assets Resulting from Operations (10,466) 16,714
-------------- --------------
DISTRIBUTIONS:
Net Investment Income (5,595) (9,003)
Net Realized Gain (4,564) --
-------------- --------------
Total Distributions (10,159) (9,003)
-------------- --------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 96,510 36,622
Distributions Reinvested 9,111 7,887
Redeemed (126,789) (80,043)
-------------- --------------
Net Decrease from Capital Share Transactions (21,168) (35,534)
-------------- --------------
Total Decrease in Net Assets (41,793) (27,823)
NET ASSETS:
Beginning of Period 172,468 130,675
-------------- --------------
End of Period (2) $ 130,675 $ 102,852
-------------- --------------
-------------- --------------
<FN>
- -------------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 8,912 3,346
Shares Issued on Distributions Reinvested 833 737
Shares Redeemed (11,801) (7,623)
-------------- --------------
Net Decrease in Capital Shares Outstanding (2,056) (3,540)
-------------- --------------
-------------- --------------
(2) Net Assets were comprised of:
Paid in Capital $ 141,657 $ 106,123
Undistributed Net Investment Income 1,613 309
Accumulated Net Realized Loss (5,933) (7,109)
Unrealized Appreciation (Depreciation) (6,662) 3,529
-------------- --------------
$ 130,675 $ 102,852
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
135
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
THE HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1994 1995
(000) (000)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 9,341 $ 7,477
Net Realized Loss (1,581) (3,145)
Change in Unrealized Appreciation (Depreciation) (12,785) 9,886
-------------- --------------
Net Increase (Decrease) in Net Assets Resulting from Operations (5,025) 14,218
-------------- --------------
DISTRIBUTIONS:
Net Investment Income (9,097) (8,122)
Net Realized Gain (1,413) --
-------------- --------------
Total Distributions (10,510) (8,122)
-------------- --------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 72,764 59,247
Distributions Reinvested 8,869 6,088
Redeemed (43,375) (106,409)
-------------- --------------
Net Increase (Decrease) from Capital Share Transactions 38,258 (41,074)
-------------- --------------
Total Increase (Decrease) in Net Assets 22,723 (34,978)
NET ASSETS:
Beginning of Period 74,500 97,223
-------------- --------------
End of Period (2) $ 97,223 $ 62,245
-------------- --------------
-------------- --------------
<FN>
- -------------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 6,882 5,865
Shares Issued on Distributions Reinvested 858 609
Shares Redeemed (4,235) (10,704)
-------------- --------------
Net Increase (Decrease) in Capital Shares Outstanding 3,505 (4,230)
-------------- --------------
-------------- --------------
(2) Net Assets were comprised of:
Paid in Capital $ 108,726 $ 67,652
Undistributed Net Investment Income 731 86
Accumulated Net Realized Loss (1,581) (4,726)
Unrealized Depreciation (10,653) (767)
-------------- --------------
$ 97,223 $ 62,245
-------------- --------------
-------------- --------------
</TABLE>
- --------------------------------------------------------------------------------
THE MUNICIPAL BOND PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 18,
1995*
TO DECEMBER 31,
1995
(000)
- ------------------------------------------------------------------------------------------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 1,963
Net Realized Gain 193
Change in Unrealized Appreciation 1,635
--------
Net Increase in Net Assets Resulting from Operations 3,791
--------
DISTRIBUTIONS:
Net Investment Income (1,963)
In Excess of Net Investment Income (15)
Net Realized Gain (193)
--------
Total Distributions (2,171)
--------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 61,800
Distributions Reinvested 2,060
Redeemed (19,611)
--------
Net Increase from Capital Share Transactions 44,249
--------
Total Increase in Net Assets 45,869
NET ASSETS:
Beginning of Period --
--------
End of Period (2) $ 45,869
--------
--------
<FN>
- ------------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 6,134
Shares Issued on Distributions Reinvested 200
Shares Redeemed (1,912)
--------
Net Increase in Capital Shares Outstanding 4,422
--------
--------
(2) Net Assets were comprised of:
Paid in Capital $ 44,249
Distributions in Excess of Net Investment Income (15)
Unrealized Appreciation 1,635
--------
$ 45,869
--------
--------
- -----------------
*Commencement of operations.
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
136
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
THE MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1994 1995
(000) (000)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSSETS
OPERATIONS:
Net Investment Income $ 26,880 $ 44,657
Net Realized Gain (Loss) (26) 79
------------- -------------
Net Increase in Net Assets Resulting from Operations 26,854 44,736
------------- -------------
DISTRIBUTIONS:
Net Investment Income (26,888) (44,657)
------------- -------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 4,547,025 8,093,985
Distributions Reinvested 24,451 41,765
Redeemed (4,538,102) (7,989,639)
------------- -------------
Net Increase from Capital Share Transactions 33,374 146,111
------------- -------------
Total Increase in Net Assets 33,340 146,190
NET ASSETS:
Beginning of Period 657,163 690,503
------------- -------------
End of Period (2) $ 690,503 $ 836,693
------------- -------------
------------- -------------
<FN>
- -----------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 4,547,025 8,093,987
Shares Issued on Distributions Reinvested 24,451 41,765
Shares Redeemed (4,538,102) (7,989,639)
------------- -------------
Net Increase in Capital Shares Outstanding 33,374 146,113
------------- -------------
------------- -------------
(2) Net Assets were comprised of:
Paid in Capital $ 690,595 $ 836,706
Accumulated Net Realized Loss (92) (13)
------------- -------------
$ 690,503 $ 836,693
------------- -------------
------------- -------------
</TABLE>
- --------------------------------------------------------------------------------
THE MUNICIPAL MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1994 1995
(000) (000)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 8,186 $ 13,579
Net Realized Loss (6) (1)
------------- -------------
Net Increase in Net Assets Resulting from Operations 8,180 13,578
------------- -------------
DISTRIBUTIONS:
Net Investment Income (8,186) (13,579)
------------- -------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 2,267,352 3,169,110
Distributions Reinvested 7,587 13,182
Redeemed (2,182,013) (3,090,216)
------------- -------------
Net Increase from Capital Share Transactions 92,926 92,076
------------- -------------
Total Increase in Net Assets 92,920 92,075
NET ASSETS:
Beginning of Period 266,524 359,444
------------- -------------
End of Period (2) $ 359,444 $ 451,519
------------- -------------
------------- -------------
<FN>
- -----------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 2,267,352 3,169,110
Shares Issued on Distributions Reinvested 7,587 13,182
Shares Redeemed (2,182,013) (3,090,216)
------------- -------------
Net Increase in Capital Shares Outstanding 92,926 92,076
------------- -------------
------------- -------------
(2) Net Assets were comprised of:
Paid in Capital $ 359,452 $ 451,528
Accumulated Net Realized Loss (8) (9)
------------- -------------
$ 359,444 $ 451,519
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
137
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE ACTIVE COUNTRY ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 17, 1992* TWO MONTHS
TO ENDED YEAR ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1992 1992 1993 1994 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 9.37 $ 9.59 $ 12.21 $ 11.65
------ ----- ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.11 0.02 0.13 0.19 0.17
Net Realized and Unrealized Gain
(Loss) on Investments (0.74) 0.20 2.75 (0.25) 1.00
------ ----- ------ ------ ------
Total from Investment Operations (0.63) 0.22 2.88 (0.06) 1.17
------ ----- ------ ------ ------
DISTRIBUTIONS
Net Investment Income -- -- (0.09) (0.14) (0.25)
In Excess of Net Investment Income -- -- (0.08) -- (0.10)
Net Realized Gain -- -- -- (0.36) (0.84)
In Excess of Net Realized Gain -- -- (0.09) -- --
------ ----- ------ ------ ------
Total Distributions -- -- (0.26) (0.50) (1.19)
------ ----- ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 9.37 $ 9.59 $ 12.21 $ 11.65 $ 11.63
------ ----- ------ ------ ------
------ ----- ------ ------ ------
TOTAL RETURN (6.30)% 2.35% 30.72% (0.52)% 10.57%
------ ----- ------ ------ ------
------ ----- ------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $47,534 $50,234 $150,854 $182,977 $170,663
Ratio of Expenses to Average Net
Assets 0.88%** 0.80%** 0.80% 0.80% 0.80%
Ratio of Net Investment Income to
Average Net Assets 2.32%** 1.22%** 1.29% 1.43% 1.26%
Portfolio Turnover Rate 62% 2% 53% 51% 72%
<FN>
- -----------------
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income $ 0.03 $ 0.01 $ 0.05 $ 0.03 $ 0.05
Ratios before expense limitation:
Expenses to Average Net Assets 1.58%** 1.70%** 1.33% 1.00% 1.18%
Net Investment Income to Average
Net Assets 1.62%** 0.32%** 0.76% 1.23% 0.88%
*Commencement of operations.
**Annualized
</TABLE>
- --------------------------------------------------------------------------------
THE ASIAN EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
JULY 1, TWO MONTHS
1991* TO YEAR ENDED ENDED YEAR ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1991 1992 1992 1993 1994 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $10.00 $ 9.67 $ 13.63 $ 13.11 $ 26.20 $ 21.54
----- ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.03 0.14 0.01 0.10 0.11 0.18
Net Realized and Unrealized Gain
(Loss) on Investments (0.36) 3.86 (0.53) 13.38 (4.15) 1.11
----- ------ ------ ------ ------ ------
Total from Investment
Operations (0.33) 4.00 (0.52) 13.48 (4.04) 1.29
----- ------ ------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income -- (0.04) -- (0.01) (0.09) (0.34)
In Excess of Net Investment
Income -- -- -- (0.13) -- (0.00)+
Net Realized Gain -- -- -- (0.12) (0.53) (3.01)
In Excess of Net Realized Gain -- -- -- (0.13) -- --
----- ------ ------ ------ ------ ------
Total Distributions -- (0.04) -- (0.39) (0.62) (3.35)
----- ------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 9.67 $ 13.63 $ 13.11 $ 26.20 $ 21.54 $ 19.48
----- ------ ------ ------ ------ ------
----- ------ ------ ------ ------ ------
TOTAL RETURN (3.30)% 41.50% (3.82)% 105.71% (15.81)% 6.87%
----- ------ ------ ------ ------ ------
----- ------ ------ ------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $10,719 $41,017 $41,978 $287,136 $276,906 $314,884
Ratio of Expenses to Average Net
Assets (1) 1.00%** 1.00% 1.00%** 1.00% 1.00% 1.00%
Ratio of Net Investment Income to
Average Net Assets (1) 1.13%** 1.53% 0.61%** 0.83% 0.52% 0.97%
Portfolio Turnover Rate 2% 33% 10% 18% 47% 42%
<FN>
- -----------------
(1) Effect of voluntary expense
limitation
during the period:
Per share benefit to net
investment income $ 0.02 $ 0.06 $ 0.02 $ 0.05 $ 0.04 $ 0.03
Ratios before expense limitation:
Expenses to Average Net Assets 2.52%** 1.63% 2.02%** 1.38% 1.20% 1.18%
Net Investment Income (Loss) to
Average
Net Assets (0.39)%** 0.90% (0.41)%** 0.45% 0.32% 0.79%
*Commencement of operations.
**Annualized
+Amount is less than $0.01 per
share.
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
138
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE EMERGING MARKETS PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 25, 1992* TWO MONTHS
TO ENDED YEAR ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1992 1992 1993 1994 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $ 10.00 $ 10.11 $ 10.22 $ 19.00 $ 16.30
------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss)
(1) -- -- (0.01) (0.04) 0.08
Net Realized and Unrealized
Gain (Loss) on Investments 0.11 0.11 8.79 (1.69) (2.05)
------ ------ ------ ------ ------
Total from Investment
Operations 0.11 0.11 8.78 (1.73) (1.97)
------ ------ ------ ------ ------
DISTRIBUTIONS
Net Investment income -- -- -- -- (0.06)
Net Realized Gain -- -- -- (0.97) (1.13)
------ ------ ------ ------ ------
Total Distributions -- -- -- (0.97) (1.19)
------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 10.11 $ 10.22 $ 19.00 $ 16.30 $ 13.14
------ ------ ------ ------ ------
------ ------ ------ ------ ------
TOTAL RETURN 1.10% 1.09% 85.91% (9.63)% (12.77)%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $28,806 $74,219 $735,352 $929,638 $876,591
Ratio of Expenses to Average Net
Assets (1) 1.75%** 1.75%** 1.75% 1.75% 1.72%
Ratio of Net Investment Income
(Loss) to Average Net Assets
(1) (0.53)%** (0.33)%** (0.06)% (0.26)% 0.60%
Portfolio Turnover Rate 0% 2% 52% 32% 54%
<FN>
- -----------------
(1) Effect of voluntary expense
limitation
during the period:
Per share benefit to net
investment income $ 0.02 $ 0.00 $ 0.01 N/A N/A
Ratios before expense
limitation:
Expenses to Average Net
Assets 4.82%** 2.48%** 1.79% N/A N/A
Net Investment Loss to
Average Net Assets (3.60)%** (1.06)%** (0.10)% N/A N/A
*Commencement of operations.
**Annualized
</TABLE>
- --------------------------------------------------------------------------------
THE EUROPEAN EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 2, 1993*
TO YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1994 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 12.91 $ 13.94
------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.08 0.08 0.14
Net Realized and Unrealized Gain on Investments 2.83 1.29 1.37
------ ------ ------
Total from Investment Operations 2.91 1.37 1.51
------ ------ ------
DISTRIBUTIONS
Net Investment Income -- (0.09) (0.15)
Net Realized Gain -- (0.25) (1.38)
------ ------ ------
Total Distributions -- (0.34) (1.53)
------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 12.91 $ 13.94 $ 13.92
------ ------ ------
------ ------ ------
TOTAL RETURN 29.10% 10.88% 11.85%
------ ------ ------
------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $12,681 $27,634 $69,583
Ratio of Expenses to Average Net Assets (1) 1.00%** 1.00% 1.00%
Ratio of Net Investment Income to Average Net Assets (1) 1.23%** 0.87% 1.37%
Portfolio Turnover Rate 15% 79% 13%
<FN>
- -----------------
(1) Effect of voluntary expense limitation during the
period:
Per share benefit to net investment income $ 0.09 $ 0.06 $ 0.03
Ratios before expense limitation:
Expenses to Average Net Assets 2.43%** 1.62% 1.25%
Net Investment Income (Loss) to Average Net Assets (0.21)%** 0.25% 1.12%
*Commencement of operations.
**Annualized
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
139
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE GLOBAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM TWO MONTHS
JULY 15, 1992* ENDED YEAR ENDED YEAR ENDED YEAR ENDED
TO OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1992 1992 1993 1994 1995
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 10.00 $ 9.35 $ 9.75 $ 13.87 $ 13.40
------- ----- ------------- ------------- -------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.02 0.01 0.08 0.08 0.18
Net Realized and Unrealized Gain
(Loss) on Investments (0.67) 0.39 4.18 0.79 2.26
------- ----- ------------- ------------- -------------
Total from Investment
Operations (0.65) 0.40 4.26 0.87 2.44
------- ----- ------------- ------------- -------------
DISTRIBUTIONS
Net Investment Income -- -- (0.02) (0.12) (0.22)
In Excess of Net Investment
Income -- -- (0.03) -- --
Net Realized Gain -- -- (0.09) (1.22) (1.31)
------- ----- ------------- ------------- -------------
Total Distributions -- -- (0.14) (1.34) (1.53)
------- ----- ------------- ------------- -------------
NET ASSET VALUE, END OF PERIOD $ 9.35 $ 9.75 $ 13.87 $ 13.40 $ 14.31
------- ----- ------------- ------------- -------------
------- ----- ------------- ------------- -------------
TOTAL RETURN (6.50)% 4.28% 44.24% 6.95% 18.66%
------- ----- ------------- ------------- -------------
------- ----- ------------- ------------- -------------
RATIO AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $11,257 $11,739 $19,918 $78,935 $91,675
Ratio of Expenses to Average Net
Assets (1) 1.00%** 1.00%** 1.00% 1.00% 1.00%
Ratio of Net Investment Income to
Average Net Assets (1) 1.00%** 0.69%** 0.84% 0.87% 1.17%
Portfolio Turnover Rate 10% 5% 42% 12% 28%
<FN>
- -----------------
(1) Effect of voluntary expense
limitation
during the period:
Per share benefit to net
investment income $ 0.08 $ 0.02 $ 0.01 $ 0.02 $ 0.02
Ratios before expense limitation:
Expenses to Average Net Assets 5.22%** 2.49%** 1.66% 1.24% 1.13%
Net Investment Income (Loss) to
Average Net Assets (3.22)%** (0.80)%** 0.18% 0.63% 1.04%
*Commencement of operations.
**Annualized
</TABLE>
- --------------------------------------------------------------------------------
THE GOLD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 1, 1994* YEAR ENDED
TO DECEMBER 31, DECEMBER 31,
1994 1995
<S> <C> <C>
- ----------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 9.13
------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (1) 0.03 (0.07)
Net Realized and Unrealized Gain
(Loss) on Investments (0.88) 1.22
------- -------
Total from Investment Operations (0.85) 1.15
------- -------
DISTRIBUTIONS
Net Investment Income (0.02) (0.01)
Net Realized Gain -- (1.72)
------- -------
Total Distributions (0.02) (1.73)
------- -------
NET ASSET VALUE, END OF PERIOD $9.13 $8.55
------- -------
------- -------
TOTAL RETURN (8.49)% 13.21%
------- -------
------- -------
RATIO AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $30,243 $7,409
Ratio of Expenses to Average Net Assets
(1) 1.25%** 1.25%
Ratio of Net Investment Income (Loss) to
Average Net Assets (1) 0.41%** (0.31)%
Portfolio Turnover Rate 56% 47%
<FN>
- -----------------
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net investment
income $ 0.04 $ 0.11
Ratios before expense limitation:
Expenses to Average Net Assets 1.72%** 1.76%
Net Investment Loss to Average Net
Assets (0.06)%** (0.82)%
*Commencement of operations.
**Annualized
</TABLE>
The accompanying notes are an integral part of these financial statements.
- --------------------------------------------------------------------------------
140
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE INTERNATIONAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TWO MONTHS
ENDED YEAR ENDED YEAR ENDED YEAR ENDED
YEAR ENDED YEAR ENDED DECEMBER DECEMBER DECEMBER DECEMBER
OCTOBER 31, OCTOBER 31, 31, 31, 31, 31,
1991 1992 1992 1993 1994 1995
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 10.05 $ 10.52 $ 9.83 $ 9.98 $ 14.09 $ 15.34
----------- ----------- ----------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.12 0.12 0.01 0.15 0.16 0.16
Net Realized and Unrealized Gain
(Loss) on Investments 0.58 (0.59) 0.14 4.36 1.54 1.55
----------- ----------- ----------- ---------- ---------- ----------
Total from Investment
Operations 0.70 (0.47) 0.15 4.51 1.70 1.71
----------- ----------- ----------- ---------- ---------- ----------
DISTRIBUTIONS
Net Investment Income (0.15) (0.17) -- (0.01) (0.18) (0.06)
In Excess of Net Investment
Income -- -- -- (0.13) -- --
Net Realized Gain (0.08) (0.05) -- (0.26) (0.27) (1.84)
----------- ----------- ----------- ---------- ---------- ----------
Total Distributions (0.23) (0.22) -- (0.40) (0.45) (1.90)
----------- ----------- ----------- ---------- ---------- ----------
NET ASSET VALUE, END OF PERIOD $ 10.52 $ 9.83 $ 9.98 $ 14.09 $ 15.34 $ 15.15
----------- ----------- ----------- ---------- ---------- ----------
----------- ----------- ----------- ---------- ---------- ----------
TOTAL RETURN 7.17% (4.56)% 1.53% 46.50% 12.39% 11.77%
----------- ----------- ----------- ---------- ---------- ----------
----------- ----------- ----------- ---------- ---------- ----------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $283,776 $486,836 $510,727 $947,045 $1,304,770 $1,598,530
Ratio of Expenses to Average Net
Assets (1) 1.00% 1.00% 1.00%** 1.00% 1.00% 1.00%
Ratio of Net Investment Income to
Average Net Assets (1) 2.27% 1.46% 0.68%** 1.25% 1.12% 1.38%
Portfolio Turnover Rate 22% 12% 5% 23% 16% 27%
<FN>
- -----------------
(1) Effect of voluntary expense
limitation
during the period:
Per share benefit to net
investment income $ 0.01 $ 0.00 $ 0.00 $ 0.01 $0.004 $0.003
Ratios before expense limitation:
Expenses to Average Net Assets 1.09% 1.02% 1.14%** 1.06% 1.03% 1.03%
Net Investment Income to
Average Net Assets 2.18% 1.44% 0.54%** 1.19% 1.09% 1.35%
**Annualized
</TABLE>
- --------------------------------------------------------------------------------
THE INTERNATIONAL SMALL CAP PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 15, 1992* YEAR ENDED YEAR ENDED YEAR ENDED
TO DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1992 1993++ 1994 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $ 10.00 $ 10.09 $ 14.64 $ 15.15
------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.01 0.09 0.14 0.24
Net Realized and Unrealized Gain
on Investments (2) 0.08 4.48 0.62 0.15
------ ------ ------ ------
Total from Investment
Operations 0.09 4.57 0.76 0.39
------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income -- 0.00 (0.03) (0.23)
In Excess of Net Investment
Income -- (0.02) -- --
Net Realized Gain -- -- (0.22) (0.37)
------ ------ ------ ------
Total Distributions -- (0.02) (0.25) (0.60)
------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 10.09 $ 14.64 $ 15.15 $ 14.94
------ ------ ------ ------
------ ------ ------ ------
TOTAL RETURN 0.90% 45.34% 5.25% 2.60%
------ ------ ------ ------
------ ------ ------ ------
RATIO AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $3,824 $52,834 $160,101 $198,669
Ratio of Expenses to Average Net
Assets (1) 1.15%** 1.15% 1.15% 1.15%
Ratio of Net Investment Income to
Average Net Assets (1) 1.37%** 0.66% 1.18% 1.72%
Portfolio Turnover Rate 0% 14% 8% 24%
<FN>
- -----------------
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income $ 0.16 $ 0.10 $ 0.02 $ 0.01
Ratios before expense limitation:
Expenses to Average Net Assets 21.67%** 1.86% 1.29% 1.24%
Net Investment Income (Loss) to
Average Net Assets (19.15)%** (0.05)% 1.04% 1.63%
(2) Includes a 1% transaction fee on purchases and redemptions of capital shares.
++Per share amounts for the year ended December 31, 1993 are based on average outstanding
shares.
*Commencement of operations.
**Annualized
</TABLE>
The accompanying notes are an integral part of these financial statements.
- --------------------------------------------------------------------------------
141
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE JAPANESE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 25, 1994* YEAR ENDED
TO DECEMBER 31, DECEMBER 31,
1994 1995
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 9.83
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (1) (0.01) 0.04
Net Realized and Unrealized Loss on Investments++ (0.16) (0.40)
------ ------
Total from Investment Operations (0.17) (0.36)
------ ------
DISTRIBUTIONS
In Excess of Net Investment Income -- (0.20)
------ ------
NET ASSET VALUE, END OF PERIOD $ 9.83 $ 9.27
------ ------
------ ------
TOTAL RETURN (1.70)% (3.64)%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $50,332 $119,278
Ratio of Expenses to Average Net Assets (1) 1.00%** 1.00%
Ratio of Net Investment Income (Loss) to Average Net Assets (1) (0.10)%** 0.15%
Portfolio Turnover Rate 1% 52%
<FN>
- ---------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net investment income $ 0.02 $ 0.06
Ratios before expense limitation:
Expenses to Average Net Assets 1.27%** 1.20%
Net Investment Loss to Average Net Assets (0.37)%** (0.05)%
*Commencement of operations.
**Annualized
++The amount shown for the year ended December 31, 1995 for a share outstanding
throughout the year does not accord with aggregate net gains on investments
for the year because of the timing of sales and repurchases of the Portfolio
shares in relation to fluctuating market value of the investments in the
Portfolio.
</TABLE>
- --------------------------------------------------------------------------------
THE LATIN AMERICAN PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 18,
1995*
TO DECEMBER 31,
1995
<S> <C>
- -----------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.05
Net Realized and Unrealized Loss on Investments (0.92)
------
Total from Investment Operations (0.87)
------
DISTRIBUTIONS
Net Investment Income (0.04)
Return of Capital (0.03)
------
Total Distributions (0.07)
------
NET ASSET VALUE, END OF PERIOD $ 9.06
------
------
TOTAL RETURN (8.68)%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $15,376
Ratio of Expenses to Average Net Assets (1) 1.70%**
Ratio of Net Investment Income to Average Net Assets (1) 0.62%**
Portfolio Turnover Rate 137%
<FN>
- ---------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net investment income $ 0.09
Ratios before expense limitation:
Expenses to Average Net Assets 3.13%**
Net Investment Loss to Average Net Assets (0.48)%**
*Commencement of operations.
**Annualized
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
142
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE AGGRESSIVE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 8, 1995*
TO
DECEMBER 31,
1995
<S> <C>
- --------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.15
Net Realized and Unrealized Gain on Investments 3.95
------
Total from Investment Operations 4.10
------
DISTRIBUTIONS
Net Investment Income (0.15)
Net Realized Gain (1.78)
------
Total Distributions (1.93)
------
NET ASSET VALUE, END OF PERIOD $ 12.17
------
------
TOTAL RETURN 41.25%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $28,548
Ratio of Expenses to Average Net Assets (1) 1.00%**
Ratio of Net Investment Income to Average Net
Assets (1) 1.64%**
Portfolio Turnover Rate 309%
<FN>
- ---------------
(1) Effect of voluntary expense limitation during
the period:
Per share benefit to net investment income $ 0.06
Ratios before expense limitation:
Expenses to Average Net Assets 1.59%**
Net Investment Income to Average Net Assets 1.05%**
*Commencement of operations.
**Annualized
</TABLE>
- --------------------------------------------------------------------------------
THE EMERGING GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TWO MONTHS
YEAR ENDED YEAR ENDED ENDED YEAR ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1991++ 1992 1992 1993 1994 1995
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 9.03 $ 16.18 $ 14.97 $ 16.22 $ 16.22 $ 16.12
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Loss (1) -- (0.09) (0.01) (0.11) (0.09) (0.18)
Net Realized and
Unrealized Gain (Loss)
on Investments 7.19 (1.12) 1.26 0.11 (0.01) 5.55
------ ------ ------ ------ ------ ------
Total from Investment
Operations 7.19 (1.21) 1.25 0.00 (0.10) 5.37
------ ------ ------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.04) -- -- -- -- --
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF
PERIOD $ 16.18 $ 14.97 $ 16.22 $ 16.22 $ 16.12 $ 21.49
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
TOTAL RETURN 79.84% (7.48)% 8.35% 0.00% (0.62)% 33.31%
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of Period
(Thousands) $54,364 $80,156 $94,161 $103,621 $117,669 $119,378
Ratio of Expenses to
Average Net Assets (1) 1.25% 1.25% 1.25%** 1.25% 1.25% 1.25%
Ratio of Net Investment
Loss to
Average Net Assets (1) 0.00% (0.66)% (0.68)%** (0.77)% (0.61)% (0.76)%
Portfolio Turnover Rate 2% 17% 1% 25% 24% 25%
<FN>
- ---------------
(1) Effect of voluntary
expense limitation
during the period:
Per share benefit to
net investment loss $ 0.02 $ 0.01 $ 0.00 $ 0.01 $ 0.002 $ 0.003
Ratios before expense
limitation:
Expenses to Average
Net Assets 1.39% 1.29% 1.36%** 1.31% 1.26% 1.26%
Net Investment Loss
to Average Net
Assets (0.14)% (0.71)% (0.79)%** (0.83)% (0.62)% (0.77)%
++Per share amounts for the year ended October 31, 1991 are based on average
outstanding shares.
**Annualized
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
143
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE EQUITY GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 2,
1991* TWO MONTHS YEAR ENDED
TO OCTOBER YEAR ENDED ENDED YEAR ENDED YEAR ENDED DECEMBER
31, OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 31,
1991 1992 1992 1993 1994 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $ 10.00 $ 10.66 $ 11.44 $ 11.88 $ 12.14 $ 12.02
----------- ----------- ------ ------ ------ -----------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.05 0.16 0.03 0.22 0.17 0.22
Net Realized and Unrealized Gain
on Investments 0.61 0.82 0.41 0.28 0.21 4.93
----------- ----------- ------ ------ ------ -----------
Total from Investment
Operations 0.66 0.98 0.44 0.50 0.38 5.15
----------- ----------- ------ ------ ------ -----------
DISTRIBUTIONS
Net Investment Income -- (0.20) -- (0.23) (0.13) (0.28)
In Excess of Net Investment
Income -- -- -- (0.01) -- --
Net Realized Gain -- -- -- -- (0.37) (2.75)
----------- ----------- ------ ------ ------ -----------
Total Distributions -- (0.20) -- (0.24) (0.50) (3.03)
----------- ----------- ------ ------ ------ -----------
NET ASSET VALUE, END OF PERIOD $ 10.66 $ 11.44 $ 11.88 $ 12.14 $ 12.02 $ 14.14
----------- ----------- ------ ------ ------ -----------
----------- ----------- ------ ------ ------ -----------
TOTAL RETURN 6.60% 9.26% 3.85% 4.33% 3.26% 45.02%
----------- ----------- ------ ------ ------ -----------
----------- ----------- ------ ------ ------ -----------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $18,139 $36,558 $45,985 $73,789 $97,259 $158,112
Ratio of Expenses to Average Net
Assets (1) 0.80%** 0.80% 0.80%** 0.80% 0.80% 0.80%
Ratio of Net Investment Income to
Average Net Assets (1) 2.34%** 1.73% 1.93%** 1.59% 1.44% 1.57%
Portfolio Turnover Rate 3% 38% 1% 172% 146% 186%
<FN>
- ---------------
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment
income $ 0.03 $ 0.02 $ 0.01 $ 0.02 $ 0.01 $ 0.01
Ratios before expense limitation:
Expenses to Average Net Assets 1.37%** 1.01% 1.11%** 0.93% 0.89% 0.88%
Net Investment Income to
Average
Net Assets 1.77%** 1.52% 1.62%** 1.46% 1.35% 1.49%
*Commencement of operations.
**Annualized
</TABLE>
- --------------------------------------------------------------------------------
THE SMALL CAP VALUE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 17,
1992*
TO DECEMBER YEAR ENDED YEAR ENDED YEAR ENDED
31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1992 1993 1994 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 10.14 $ 11.10 $ 10.80
------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.01 0.24 0.28 0.30
Net Realized and Unrealized Gain (Loss) on
Investments 0.13 0.90 (0.01) 1.82
------ ------ ------ ------
Total from Investment Operations 0.14 1.14 0.27 2.12
------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income -- (0.18) (0.27) (0.38)
Net Realized Gain -- -- (0.30) (0.63)
------ ------ ------ ------
Total Distributions -- (0.18) (0.57) (1.01)
------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 10.14 $ 11.10 $ 10.80 $ 11.91
------ ------ ------ ------
------ ------ ------ ------
TOTAL RETURN 1.40% 11.33% 2.53% 20.63%
------ ------ ------ ------
------ ------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $5,974 $26,775 $40,033 $51,919
Ratio of Expenses to Average Net Assets (1) 1.00%** 1.00% 1.00% 1.00%
Ratio of Net Investment Income to Average Net
Assets (1) 1.64%** 2.56% 2.67% 2.60%
Portfolio Turnover Rate 0% 29% 22% 36%
<FN>
- ---------------
(1) Effect of voluntary expense limitation during
the period:
Per share benefit to net investment income $ 0.13 $ 0.06 $ 0.03 $ 0.02
Ratios before expense limitation:
Expenses to Average Net Assets 23.14%** 1.68% 1.26% 1.21%
Net Investment Income (Loss) to Average Net
Assets (20.50)%** 1.88% 2.41% 2.39%
*Commencement of operations.
**Annualized
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
144
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE U.S. REAL ESTATE PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 24, 1995*
TO DECEMBER 31, 1995
- ------------------------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.26
Net Realized and Unrealized Gain on Investments 1.84
------
Total from Investment Operations 2.10
------
DISTRIBUTIONS
Net Investment Income (0.24)
Net Realized Gain (0.44)
------
Total Distributions (0.68)
------
NET ASSETS, END OF PERIOD $11.42
------
------
TOTAL RETURN 21.07%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $69,509
Ratio of Expenses to Average Net Assets (1) 1.00%**
Ratio of Net Investment Income to Average Net
Assets (1) 4.04%**
Portfolio Turnover Rate 158%
<FN>
- ---------------
(1) Effect of voluntary expense limitation during
the period:
Per share benefit to net investment income $ 0.02
Ratios before expense limitation:
Expenses to Average Net Assets 1.33%**
Net Investment Income to Average Net Assets 3.71%**
*Commencement of operations.
**Annualized
</TABLE>
- --------------------------------------------------------------------------------
THE VALUE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TWO MONTHS
YEAR ENDED YEAR ENDED ENDED YEAR ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1991 1992 1992 1993 1994 1995
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 8.59 $ 10.24 $ 10.71 $ 11.31 $ 12.63 $ 11.50
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(1) 0.46 0.38 0.08 0.37 0.40 0.38
Net Realized and
Unrealized Gain (Loss)
on Investments 1.67 0.48 0.52 1.31 (0.55) 3.30
------ ------ ------ ------ ------ ------
Total from Investment
Operations 2.13 0.86 0.60 1.68 (0.15) 3.68
------ ------ ------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.48) (0.39) -- (0.36) (0.40) (0.47)
Net Realized Gain -- -- -- -- (0.58) (0.77)
------ ------ ------ ------ ------ ------
Total Distributions (0.48) (0.39) -- (0.36) (0.98) (1.24)
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF
PERIOD $ 10.24 $ 10.71 $ 11.31 $ 12.63 $ 11.50 $ 13.94
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
TOTAL RETURN 25.34% 8.51% 5.60% 15.14% (1.29)% 33.69%
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of Period
(Thousands) $16,304 $25,013 $27,541 $54,598 $73,406 $147,365
Ratio of Expenses to
Average Net Assets (1) 0.70% 0.70% 0.70%** 0.70% 0.70% 0.70%
Ratio of Net Investment
Income to Average Net
Assets (1) 4.57% 3.72% 4.41%** 3.23% 3.37% 3.01%
Portfolio Turnover Rate 90% 56% 9% 51% 33% 43%
<FN>
- ---------------
(1) Effect of voluntary
expense
limitation during the
period:
Per share benefit to
net investment income $ 0.02 $ 0.01 $ 0.01 $ 0.03 $ 0.01 $ 0.01
Ratios before expense
limitation:
Expenses to Average
Net Assets 0.87% 0.84% 1.20%** 0.95% 0.80% 0.77%
Net Investment Income
to
Average Net Assets 4.40% 3.58% 3.91%** 2.98% 3.27% 2.94%
**Annualized
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
145
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TWO MONTHS
YEAR ENDED YEAR ENDED ENDED YEAR ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31, DECEMBER DECEMBER 31, DECEMBER 31, DECEMBER 31,
1991 1992 31, 1992 1993 1994 1995
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 9.62 $ 10.61 $ 11.00 $ 11.31 $ 11.13 $ 8.96
------ ----------- ----------- ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(1) 0.59 0.58 0.10 0.44 0.42 0.39
Net Realized and
Unrealized Gain (Loss)
on Investments 1.03 0.42 0.21 0.79 (0.64) 1.62
------ ----------- ----------- ------ ------ ------
Total from Investment
Operations 1.62 1.00 0.31 1.23 (0.22) 2.01
------ ----------- ----------- ------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.63) (0.58) -- (0.41) (0.49) (0.50)
In Excess of Net
Investment Income -- -- -- (0.08) -- --
Net Realized Gain -- (0.03) -- (0.06) (1.46) (0.49)
In Excess of Net
Realized Gain -- -- -- (0.86) -- --
------ ----------- ----------- ------ ------ ------
Total Distributions (0.63) (0.61) -- (1.41) (1.95) (0.99)
------ ----------- ----------- ------ ------ ------
NET ASSET VALUE, END OF
PERIOD $ 10.61 $ 11.00 $ 11.31 $ 11.13 $ 8.96 $ 9.98
------ ----------- ----------- ------ ------ ------
------ ----------- ----------- ------ ------ ------
TOTAL RETURN 17.31% 9.57% 2.82% 12.09% (2.32)% 23.63%
------ ----------- ----------- ------ ------ ------
------ ----------- ----------- ------ ------ ------
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of Period
(Thousands) $51,334 $40,332 $39,984 $29,684 $18,492 $22,642
Ratio of Expenses to
Average Net Assets (1) 0.70% 0.70% 0.70%** 0.70% 0.70% 0.70%
Ratio of Net Investment
Income to Average
Net Assets (1) 5.99% 5.21% 5.29%** 3.88% 4.13% 4.10%
Portfolio Turnover Rate 67% 40% 4% 136% 44% 26%
<FN>
- ---------------
(1) Effect of voluntary
expense limitation
during the period:
Per share benefit to
net investment
income $ 0.01 $ 0.01 $ 0.01 $ 0.04 $ 0.03 $ 0.03
Ratios before expense
limitation:
Expenses to Average
Net Assets 0.78% 0.79% 1.00%** 1.02% 0.95% 1.02%
Net Investment Income
to Average Net
Assets 5.91% 5.12% 4.99%** 3.56% 3.88% 3.78%
**Annualized
</TABLE>
- --------------------------------------------------------------------------------
THE EMERGING MARKETS DEBT PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 1,
1994* YEAR ENDED
TO DECEMBER 31, DECEMBER 31,
1994 1995
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 8.59
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.50 1.36
Net Realized and Unrealized Gain (Loss) on Investments (1.91) 0.91
------ ------
Total from Investment Operations (1.41) 2.27
------ ------
DISTRIBUTIONS
Net Investment Income -- (1.86)
Net Realized Gain -- (0.41)
------ ------
Total Distributions -- (2.27)
------ ------
NET ASSET VALUE, END OF PERIOD $ 8.59 $ 8.59
------ ------
------ ------
TOTAL RETURN (14.10)% 28.23%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $144,949 $181,878
Ratio of Expenses to Average Net Assets 1.49%** 1.75%
Ratio of Net Investment Income to Average Net Assets 9.97%** 14.70%
Portfolio Turnover Rate 273% 406%
<FN>
- ---------------
*Commencement of operations.
**Annualized
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
146
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE FIXED INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
MAY 15, TWO MONTHS
1991* YEAR ENDED ENDED YEAR ENDED YEAR ENDED YEAR ENDED
TO OCTOBER OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
31, 1991 1992 1992 1993 1994 1995
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 10.00 $ 10.55 $ 10.92 $ 10.93 $ 11.05 $ 9.82
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.22 0.69 0.10 0.54 0.59 0.72
Net Realized and Unrealized Gain
(Loss) on Investments 0.49 0.39 0.01 0.41 (0.92) 1.06
------ ------ ------ ------ ------ ------
Total from Investment
Operations 0.71 1.08 0.11 0.95 (0.33) 1.78
------ ------ ------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.16) (0.69) (0.10) (0.56) (0.53) (0.79)
In Excess of Net Investment
Income -- -- -- (0.01) -- --
Net Realized Gain -- (0.02) -- (0.26) (0.37) --
In Excess of Net Realized Gain -- -- -- -- (0.00)+ --
------ ------ ------ ------ ------ ------
Total Distributions (0.16) (0.71) (0.10) (0.83) (0.90) (0.79)
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 10.55 $ 10.92 $ 10.93 $ 11.05 $ 9.82 $ 10.81
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
TOTAL RETURN 7.12% 10.61% 1.02% 9.07% (3.10)% 18.76%
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $72,326 $146,546 $154,210 $240,668 $209,331 $165,527
Ratio of Expenses to Average Net
Assets (1) 0.45%** 0.45% 0.45%** 0.45% 0.45% 0.45%
Ratio of Net Investment Income to
Average Net Assets (1) 7.29%** 6.59% 5.56%** 4.97% 5.73% 6.85%
Portfolio Turnover Rate 48% 105% 15% 240% 388% 172%
<FN>
- ---------------
(1) Effect of voluntary expense
limitation
during the period:
Per share benefit to net
investment income $ 0.01 $ 0.02 $ 0.01 $ 0.02 $ 0.01 $ 0.01
Ratios before expense limitation:
Expenses to Average Net Assets 0.81%** 0.59% 0.75%** 0.60% 0.58% 0.59%
Net Investment Income to
Average Net Assets 6.93%** 6.45% 5.26%** 4.82% 5.60% 6.71%
*Commencement of operations.
**Annualized
+Amount is less than $0.01 per
share
</TABLE>
- --------------------------------------------------------------------------------
THE GLOBAL FIXED INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
MAY 1, 1991* TWO MONTHS
TO OCTOBER YEAR ENDED ENDED YEAR ENDED YEAR ENDED YEAR ENDED
31, OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1991 1992 1992 1993 1994 1995
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 10.00 $ 10.61 $ 11.41 $ 11.26 $ 11.68 $ 10.29
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.16 0.53 0.14 0.69 0.70 0.76
Net Realized and Unrealized Gain
(Loss) on Investments 0.45 0.55 (0.29) 0.90 (1.38) 1.15
------ ------ ------ ------ ------ ------
Total from Investment
Operations 0.61 1.08 (0.15) 1.59 (0.68) 1.91
------ ------ ------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income -- (0.27) -- (0.79) (0.40) (0.98)
In Excess of Net Investment
Income -- -- -- (0.22) -- --
Net Realized Gain -- (0.01) -- (0.16) (0.31) --
------ ------ ------ ------ ------ ------
Total Distributions -- (0.28) -- (1.17) (0.71) (0.98)
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 10.61 $ 11.41 $ 11.26 $ 11.68 $ 10.29 $ 11.22
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
TOTAL RETURN 6.10% 10.29% (1.31)% 15.34% (6.08)% 19.32%
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $28,236 $94,847 $92,897 $172,468 $130,675 $102,852
Ratio of Expenses to Average Net
Assets (1) 0.50%** 0.50% 0.50%** 0.50% 0.50% 0.50%
Ratio of Net Investment Income to
Average Net Assets (1) 7.24%** 6.92% 6.99%** 5.99% 6.34% 6.79%
Portfolio Turnover Rate 20% 144% 9% 108% 171% 207%
<FN>
- ---------------
(1) Effect of voluntary expense
limitation
during the period:
Per share benefit to net
investment income $ 0.02 $ 0.03 $ 0.01 $ 0.02 $ 0.02 $ 0.02
Ratios before expense limitation:
Expenses to Average Net Assets 1.62%** 0.86% 0.90%** 0.70% 0.66% 0.71%
Net Investment Income to
Average Net Assets 6.12%** 6.56% 6.59%** 5.79% 6.18% 6.58%
*Commencement of operations.
**Annualized
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
147
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM TWO MONTHS ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 28, 1992* DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
TO OCTOBER 31, 1992 1992 1993 1994 1995
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $ 10.00 $ 9.77 $ 9.95 $ 11.16 $ 9.55
------- ------ ------------ ------------ -------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (1) 0.08 0.14 0.90 0.97 1.14
Net Realized and Unrealized
Gain (Loss)
on Investments (0.31) 0.19 1.21 (1.40) 0.97
------- ------ ------------ ------------ -------
Total from Investment
Operations (0.23) 0.33 2.11 (0.43) 2.11
------- ------ ------------ ------------ -------
DISTRIBUTIONS
Net Investment Income -- (0.15) (0.90) (0.97) (1.20)
Net Realized Gain -- -- -- (0.21) --
------- ------ ------------ ------------ -------
Total Distributions -- (0.15) (0.90) (1.18) (1.20)
------- ------ ------------ ------------ -------
NET ASSET VALUE, END OF PERIOD $ 9.77 $ 9.95 $ 11.16 $ 9.55 $ 10.46
------- ------ ------------ ------------ -------
------- ------ ------------ ------------ -------
TOTAL RETURN (2.30)% 3.41% 22.11% (4.18)% 23.35%
------- ------ ------------ ------------ -------
------- ------ ------------ ------------ -------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $16,950 $20,194 $74,500 $97,223 $62,245
Ratio of Expenses to Average
Net Assets (1) 0.75%** 0.75%** 0.75% 0.75% 0.75%
Ratio of Net Investment Income
to Average Net Assets (1) 9.89%** 8.96%** 8.70% 9.42% 11.09%
Portfolio Turnover Rate 9% 24% 104% 74% 90%
<FN>
- -----------------
(1) Effect of voluntary
expense limitation
during the period:
Per share benefit to net
investment income $ 0.01 $ 0.01 $ 0.02 $0.001 $ 0.01
Ratios before expense
limitation:
Expenses to Average Net
Assets 1.23%** 1.62%** 0.96% 0.76% 0.83%
Net Investment Income to
Average Net Assets 9.41%** 8.09%** 8.49% 9.41% 11.01%
*Commencement of operations.
**Annualized
</TABLE>
- --------------------------------------------------------------------------------
THE MUNICIPAL BOND PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 18, 1995*
TO DECEMBER 31, 1995
- ------------------------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
-------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.44
Net Realized and Unrealized Gain on Investments 0.42
-------
Total from Investment Operations 0.86
-------
DISTRIBUTIONS
Net Investment Income (0.45)
In Excess of Net Investment Income (0.00)+
Net Realized Gain (0.04)
-------
TOTAL DISTRIBUTIONS (0.49)
-------
Net Asset Value, End of Period $10.37
-------
-------
TOTAL RETURN 8.80%
-------
-------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $45,869
Ratio of Expenses to Average Net Assets (1) 0.45%**
Ratio of Net Investment Income to Average Net
Assets (1) 4.61%**
Portfolio Turnover Rate 180%
<FN>
- -----------------
(1) Effect of voluntary expense limitation during
the period:
Per share benefit to net investment income $ 0.03
Ratios before expense limitation:
Expenses to Average Net Assets 0.73%**
Net Investment Income to Average Net Assets 4.33%**
*Commencement of operations.
**Annualized
+Amount is less than $0.01 per share.
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
148
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TWO MONTHS
ENDED YEAR ENDED YEAR ENDED YEAR ENDED
YEAR ENDED YEAR ENDED DECEMBER DECEMBER DECEMBER DECEMBER
OCTOBER 31, OCTOBER 31, 31, 31, 31, 31,
1991 1992 1992 1993 1994 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
----------- ----------- ----------- ----------- ----------- -----------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(1) 0.062 0.039 0.005 0.027 0.040 0.054
----------- ----------- ----------- ----------- ----------- -----------
DISTRIBUTIONS
Net Investment Income (0.062) (0.039) (0.005) (0.027) (0.040) (0.054)
In Excess of Net
Investment Income -- -- -- 0.000+ -- --
----------- ----------- ----------- ----------- ----------- -----------
Total Distributions (0.062) (0.039) (0.005) (0.027) (0.040) (0.054)
----------- ----------- ----------- ----------- ----------- -----------
NET ASSET VALUE, END OF
PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
TOTAL RETURN 6.37% 3.77% 0.50% 2.76% 3.84% 5.51%
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of Period
(Thousands) $607,087 $612,968 $599,172 $657,163 $690,503 $836,693
Ratio of Expenses to
Average Net Assets (1) 0.53% 0.52% 0.55%** 0.53% 0.49% 0.51%
Ratio of Net Investment
Income to Average Net
Assets (1) 6.11% 3.74% 3.11%** 2.71% 3.77% 5.37%
<FN>
- ---------------
(1) Effect of voluntary
expense limitation
during the period:
Per share benefit to
net investment
income N/A N/A $ 0.000+ $ 0.000+ N/A N/A
Ratios before expense
limitation:
Expenses to Average
Net Assets N/A N/A 0.59%** 0.54% N/A N/A
Net Investment Income
to Average Net
Assets N/A N/A 3.07%** 2.70% N/A N/A
**Annualized
+Amount is less than
$0.001 per share.
</TABLE>
- --------------------------------------------------------------------------------
THE MUNICIPAL MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TWO MONTHS
ENDED YEAR ENDED YEAR ENDED YEAR ENDED
YEAR ENDED YEAR ENDED DECEMBER DECEMBER DECEMBER DECEMBER
OCTOBER 31, OCTOBER 31, 31, 31, 31, 31,
1991 1992 1992 1993 1994 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
----------- ----------- ----------- ----------- ----------- -----------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(1) 0.043 0.026 0.004 0.019 0.020 0.034
----------- ----------- ----------- ----------- ----------- -----------
DISTRIBUTIONS
Net Investment Income (0.043) (0.026) (0.004) (0.019) (0.020) (0.034)
In Excess of Net
Investment Income -- -- -- (0.000)+ -- --
----------- ----------- ----------- ----------- ----------- -----------
Total Distributions (0.043) (0.026) (0.004) (0.019) (0.020) (0.034)
----------- ----------- ----------- ----------- ----------- -----------
NET ASSET VALUE, END OF
PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
TOTAL RETURN 4.35% 2.74% 0.37% 1.91% 2.44% 3.44%
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of Period
(Thousands) $166,953 $206,691 $208,866 $266,524 $359,444 $451,519
Ratio of Expenses to
Average Net Assets (1) 0.56% 0.55% 0.57%** 0.54% 0.51% 0.52%
Ratio of Net Investment
Income to Average Net
Assets (1) 4.18% 2.66% 2.31%** 1.89% 2.42% 3.38%
<FN>
- ---------------
(1) Effect of voluntary
expense limitation
during the period:
Per share benefit to
net investment
income N/A N/A $ 0.000+ $ 0.000+ N/A N/A
Ratios before expense
limitation:
Expenses to Average
Net Assets N/A N/A 0.67%** 0.56% N/A N/A
Net Investment Income
to Average Net
Assets N/A N/A 2.21%** 1.87% N/A N/A
**Annualized
+Amount is less than
$0.001 per share.
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
149
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
Morgan Stanley Institutional Fund, Inc. (the "Fund") is registered under the
Investment Company Act of 1940 as an open-end management investment company. As
of December 31, 1995, the Fund was comprised of 24 separate active, diversified
and non-diversified portfolios (each referred to as the "Portfolio"). During the
year ended December 31, 1995, the following Portfolios commenced operations:
Latin American Portfolio and Municipal Bond Portfolio on January 18, 1995, the
U.S. Real Estate Portfolio on February 24, 1995, and the Aggressive Equity
Portfolio on March 8, 1995. Please refer to the manager's reports included
elsewhere in this annual report for a description of each Portfolio's investment
objectives.
A. The following significant accounting policies are in conformity with
generally accepted accounting principles for investment companies. Such policies
are consistently followed by the Fund in the preparation of the financial
statements. Generally accepted accounting principles may require management to
make estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results may differ from those estimates. The
U.S. Real Estate Portfolio owns shares of real estate investment trusts
("REITs") which report information on the source of their distributions
annually. A portion of distributions received from REITs during the year is
estimated to be a return of capital and is recorded as a reduction of their
cost.
1. SECURITY VALUATION: Equity securities listed on a U.S. exchange and equity
securities traded on NASDAQ are valued at the latest quoted sales price.
Securities listed on a foreign exchange are valued at their closing price.
Unlisted securities and listed securities not traded on the valuation date for
which market quotations are readily available are valued at the mean between the
current bid and asked prices obtained from reputable brokers. Bonds and other
fixed income securities may be valued according to the broadest and most
representative market. In addition, bonds and other fixed income securities may
be valued on the basis of prices provided by a pricing service which are based
primarily on institutional size trading in similar groups of securities. Debt
securities purchased with remaining maturities of 60 days or less are valued at
amortized cost, if it approximates market value. Securities owned by the Money
Market and Municipal Money Market Portfolios are stated at amortized cost, which
approximates market value. All other securities and assets for which market
values are not readily available, including restricted securities, are valued at
fair value as determined in good faith by the Board of Directors, although the
actual calculations may be done by others.
2. INCOME TAXES: It is each Portfolio's intention to qualify as a regulated
investment company and distribute all of its taxable and tax-exempt income.
Accordingly, no provision for Federal income taxes is required in the financial
statements.
A Portfolio may be subject to taxes imposed by countries in which it invests.
Such taxes are generally based on either income or gains earned or repatriated.
The Portfolio accrues such taxes when the related income is earned. For
investments in securities subject to a capital gains tax, such taxes are accrued
based on the relative amounts of net realized gains and net unrealized
appreciation of such securities. Prior to March 10, 1995, the Brazilian
government assessed a 1% tax on all settlements of foreign currency used to
purchase listed equity securities. The Brazilian government repealed this tax on
March 10, 1995.
Paid in capital, undistributed (distributions in excess of) net investment
income/accumulated net investment loss and accumulated gain (loss) have been
adjusted for permanent book-tax differences, if any, for the Portfolios. These
differences are primarily due to differing book-tax treatments for foreign
currency transactions, net operating losses, foreign taxes on net realized
gains, deductibility of interest expense on short sales and gains on certain
securities of corporations designated as "passive foreign investment companies".
3. REPURCHASE AGREEMENTS: In connection with transactions in repurchase
agreements, a bank as custodian for the Fund takes possession of the underlying
securities, with a market value at least equal to the amount of the repurchase
transaction, including principal and accrued interest. To the extent that any
repurchase transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to determine the adequacy of the collateral.
In the event of default on the obligation to repurchase, the Fund has the right
to liquidate the collateral and apply the proceeds in satisfaction of the
obligation. In the event of default or bankruptcy by the counter party to the
agreement, realization and/or retention of the collateral or proceeds may be
subject to legal proceedings.
4. REVERSE REPURCHASE AGREEMENTS: The Emerging Markets Debt Portfolio may enter
into reverse repurchase agreements with institutions that the Portfolio's
investment adviser has determined are creditworthy. Under a reverse repurchase
agreement, the Portfolio sells securities and agrees to repurchase them at a
mutually agreed upon date and price. Reverse repurchase agreements involve the
risk that the market value of the securities purchased with the proceeds from
the sale of securities received by the Portfolio may decline below the price of
the securities the Portfolio is
- --------------------------------------------------------------------------------
150
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
obligated to repurchase. Securities subject to repurchase under reverse
repurchase agreements are designated as such in the Statement of Net Assets.
At December 31, 1995 the Emerging Markets Debt Portfolio had reverse repurchase
agreements outstanding as follows:
<TABLE>
<CAPTION>
MATURITY IN
30 TO 90
DAYS
------------
<S> <C>
Maturity Amount................................. $12,225,000
------------
Market Value of Assets Sold Under
Agreements..................................... 14,250,000
Weighted Average Interest Rate.................. 6.503%
------------
</TABLE>
For the Emerging Markets Debt Portfolio, the average weekly balance of reverse
repurchase agreements outstanding during the year ended December 31, 1995 was
approximately $1,952,000, at a weighted average interest rate of 5.820%.
5. FOREIGN CURRENCY TRANSLATION AND FOREIGN INVESTMENTS: The books and records
of the Fund are maintained in United States dollars. Foreign currency amounts
are translated into U.S. dollars at the mean of the bid and asked prices of such
currencies against U.S. dollars last quoted by a major U.S. or foreign bank.
Although the net assets of the Fund are presented at the foreign exchange rates
and market values at the close of the period, the Fund does not isolate that
portion of the results of operations arising as a result of changes in the
foreign exchange rates from the fluctuations arising from changes in the market
prices of the securities held at period end. Similarly, the Fund does not
isolate the effect of changes in foreign exchange rates from the fluctuations
arising from changes in the market prices of securities sold during the period.
Accordingly, realized and unrealized foreign currency gains (losses) are
included in the reported net realized and unrealized gains (losses) on
investment transactions balances. However, pursuant to U.S. Federal income tax
regulations, gains and losses from certain foreign currency transactions are
treated as ordinary income for U.S. Federal income tax purposes.
Net realized gains (losses) on foreign currency transactions represent net
foreign exchange gains (losses) from forward foreign currency exchange
contracts, disposition of foreign currencies, currency gains or losses realized
between the trade and settlement dates on securities transactions, and the
difference between the amount of investment income and foreign withholding taxes
recorded on the Fund's books and the U.S. dollar equivalent amounts actually
received or paid. Net unrealized currency gains (losses) from valuing foreign
currency denominated assets and liabilities at period end exchange rates are
reflected as a component of unrealized appreciation (depreciation) on the
Statement of Changes in Net Assets. The change in net unrealized currency gains
(losses) for the period is reflected on the Statement of Operations.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of U.S. dollar denominated
transactions as a result of, among other factors, the possibility of lower
levels of governmental supervision and regulation of foreign securities markets
and the possibility of political or economic instability.
6. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS: Each Portfolio, except the
Equity Growth, U.S. Real Estate, Municipal Bond, Money Market and Municipal
Money Market Portfolios, may enter into forward currency exchange contracts to
attempt to protect securities and related receivables and payables against
changes in future foreign currency exchange rates. A forward currency exchange
contract is an agreement between two parties to buy or sell currency at a set
price on a future date. The market value of the contract will fluctuate with
changes in currency exchange rates. The contract is marked-to-market daily using
the forward rate and the change in market value is recorded by the Fund as
unrealized gain or loss. The Fund records realized gains or losses when the
contract is closed equal to the difference between the value of the contract at
the time it was opened and the value at the time it was closed. Risk may arise
upon entering into these contracts from the potential inability of
counterparties to meet the terms of their contracts and is generally limited to
the amount of the unrealized gain on the contracts (if any) at the date of
default. Risks may also arise from unanticipated movements in the value of a
foreign currency relative to the U.S. dollar.
7. FORWARD COMMITMENTS AND WHEN-ISSUED/DELAYED DELIVERY SECURITIES: Each
Portfolio may make forward commitments to purchase or sell securities. Payment
and delivery for securities which have been purchased or sold on a forward
commitment basis can take place a month or more (not to exceed 120 days) after
the date of the transaction. Additionally, certain Portfolios may purchase
securities on a when-issued or delayed-delivery basis. Securities purchased on a
when-issued or delayed delivery basis are purchased for delivery beyond the
normal settlement date at a stated price and yield, and no income accrues to the
Portfolio on such securities prior to delivery. When the Portfolio enters into a
purchase transaction on a when-issued or delayed delivery basis, it establishes
a segregated account in which it maintains liquid assets in an amount at least
equal in value to the Portfolio's commitments to purchase such securities.
Purchasing
- --------------------------------------------------------------------------------
151
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
securities on a forward commitment or when-issued or delayed-delivery basis may
involve a risk that the market price at the time of delivery may be lower than
the agreed-upon purchase price, in which case there could be an unrealized loss
at the time of delivery.
8. LOAN AGREEMENTS: The Emerging Markets, Emerging Markets Debt and High Yield
Portfolios may invest in fixed and floating rate loans ("Loans") arranged
through private negotiations between an issuer of sovereign debt obligations and
one or more financial institutions ("Lenders") deemed to be creditworthy by the
investment adviser. The Portfolio's investments in Loans may be in the form of
participations in Loans ("Participations") or assignments of all or a portion of
Loans ("Assignments") from third parties. The Portfolio's investment in
Participations typically results in the Portfolio having a contractual
relationship with only the Lender and not with the borrower. The Portfolio has
the right to receive payments of principal, interest and any fees to which it is
entitled only from the Lender selling the Participation and only upon receipt by
the Lender of the payments from the borrower. The Portfolio generally has no
right to enforce compliance by the borrower with the terms of the loan
agreement. As a result, the Portfolio may be subject to the credit risk of both
the borrower and the Lender that is selling the Participation. When the
Portfolio purchases Assignments from Lenders, it acquires direct rights against
the borrower on the Loan. Because Assignments are arranged through private
negotiations between potential assignees and potential assignors, the rights and
obligations acquired by the Portfolio as the purchaser of an Assignment may
differ from, and be more limited than, those held by the assigning Lender.
9. SHORT SALES: The Aggressive Equity and Emerging Markets Debt Portfolios may
sell securities short. A short sale is a transaction in which the Portfolio
sells securities it does not own, but has borrowed, in anticipation of a decline
in the market price of the securities. The Portfolio is obligated to replace the
borrowed securities at the market price at the time of replacement. The
Portfolio may have to pay a premium to borrow the securities as well as pay any
dividends or interest payable on the securities until they are replaced. The
Portfolio's obligation to replace the securities borrowed in connection with a
short sale will generally be secured by collateral deposited with the broker
that consists of cash, U.S. government securities or other liquid, high grade
debt obligations. In addition, the Portfolio will place in a segregated account
with its Custodian an amount of cash, U.S. government securities or other liquid
high grade debt obligations equal to the difference, if any, between (1) the
market value of the securities sold at the time they were sold short and (2) any
cash, U.S. government securities or other liquid high grade debt obligations
deposited as collateral with the broker in connection with the short sale (not
including the proceeds of the short sale). Short sales by the Portfolio involve
certain risks and special considerations. Possible losses from short sales
differ from losses that could be incurred from a purchase of a security, because
losses from short sales may be unlimited, whereas losses from purchases cannot
exceed the total amount invested.
10. PURCHASED AND WRITTEN OPTIONS: Certain Portfolios may write covered call and
put options on their securities. Premiums are received and are recorded as
liabilities, and subsequently adjusted to the current value of the options
written. Premiums received from writing options which expire are treated as
realized gains. Premiums received from writing options which are exercised or
are canceled in closing purchase transactions are offset against the proceeds or
amount paid on the transaction to determine the realized gain or loss. By
writing a covered call option, a Portfolio foregoes in exchange for the premium
the opportunity for capital appreciation above the exercise price should the
market price of the underlying security increase. By writing a covered put
option, a Portfolio, in exchange for the premium, accepts the risk of a decline
in the market value of the underlying security below the exercise price.
Certain Portfolios may purchase call and put options on their portfolio
securities. Each Portfolio may purchase call options to close out covered
written call positions or to protect against an increase in the price of the
security it anticipates purchasing. Each Portfolio may purchase put options on
their securities to protect against a decline in the value of the security or to
close out covered written put positions. Possible losses from purchased options
cannot exceed the total amount invested.
11. OTHER: Security transactions are accounted for on the date the securities
are purchased or sold. Costs used in determining realized gains and losses on
the sale of investment securities are those of specific securities sold.
Dividend income is recorded on the ex-dividend date. Interest income is
recognized on the accrual basis except where collection is in doubt. Discounts
and premiums on securities purchased (other than mortgage-backed securities) are
amortized according to the effective yield method over their respective lives.
Most expenses of the Fund can be directly attributed to a particular Portfolio.
Expenses which cannot be directly attributed are apportioned among
- --------------------------------------------------------------------------------
152
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
the Portfolios based upon relative average net assets. Dividends to the
shareholders of the Money Market and the Municipal Money Market Portfolios are
accrued daily and are distributed on or about the 15th of each month.
Distributions from the remaining Portfolios are recorded on the ex-date.
Income distributions and capital gain distributions are determined in accordance
with U.S. Federal income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to the
timing of the recognition of gains or losses on securities and forward currency
exchange contracts, the timing of the deductibility of certain foreign taxes,
dividends received from real estate investment trusts and permanent differences
as presented in Note A-2.
Current period permanent book-tax differences, if any, are not included in
ending undistributed (distributions in excess of) net investment
income/accumulated net investment loss for the purpose of calculating net
investment income (loss) per share in the Financial Highlights.
Prior governmental approval for foreign investments may be required under
certain circumstances in some emerging countries, and the extent of foreign
investment in domestic companies may be subject to limitation in other emerging
countries. Foreign ownership limitations also may be imposed by the charters of
individual companies in emerging countries to prevent, among other concerns,
violation of foreign investment limitations. As a result, an additional class of
shares (identified as "Foreign" in the Statement of Net Assets) may be created
and offered for investment. The "local" and "foreign" shares' market values may
differ.
A transaction fee of one percent is charged on subscriptions and redemptions of
capital shares of the International Small Cap Portfolio. Such fees are paid to
or retained by the Portfolio and included in paid in capital. During the year
ended December 31, 1995, such transaction fees totaled approximately $827,000.
B. Morgan Stanley Asset Management Inc. ("MSAM") (the "Adviser") provides the
Fund with investment advisory services at a fee calculated at the annual rates
of average daily net assets indicated below. MSAM has agreed to reduce fees
payable to it and to reimburse the Portfolios, if necessary, if the annual
operating expenses, as defined, expressed as a percentage of average daily net
assets, exceed the maximum ratios indicated as follows:
<TABLE>
<CAPTION>
ADVISORY MAXIMUM
PORTFOLIO FEE EXPENSE RATIO
------------ -------------
<S> <C> <C>
Active Country Allocation............. .65% .80%
Asian Equity.......................... .80 1.00
Emerging Markets...................... 1.25 1.75
European Equity....................... .80 1.00
Global Equity......................... .80 1.00
Gold.................................. 1.00 1.25
International Equity.................. .80 1.00
International Small Cap............... .95 1.15
Japanese Equity....................... .80 1.00
Latin American........................ 1.10 1.70
Aggressive Equity..................... .80 1.00
Emerging Growth....................... 1.00 1.25
Equity Growth......................... .60 .80
Small Cap Value Equity................ .85 1.00
U.S. Real Estate...................... .80 1.00
Value Equity.......................... .50 .70
Balanced.............................. .50 .70
Emerging Markets Debt................. 1.00 1.75
Fixed Income.......................... .35 .45
Global Fixed Income................... .40 .50
High Yield............................ .50 .75
Municipal Bond........................ .35 .45
Money Market.......................... .30 .55
Municipal Money Market................ .30 .57
</TABLE>
Sun Valley Gold Company is the sub-adviser ("Sub-Adviser") of the Gold
Portfolio. The Sub-Adviser is entitled to receive an annual sub-advisory fee in
an amount equal to .40% of the average daily net assets of the Portfolio. The
Sub-Adviser has agreed to a proportionate reduction in its fees if the Adviser
is required to waive its fees or to reimburse the Portfolio.
C. MSAM also provides the Fund with administrative services pursuant to an
administrative agreement, for a monthly fee which on an annual basis equals
0.15% of the average daily net assets of each Portfolio plus reimbursement of
out-of-pocket expenses. Under an agreement between MSAM and The Chase Manhattan
Bank, N.A. ("Chase"), effective September 1, 1995, Chase, through its affiliate
Chase Global Funds Services Company, formerly Mutual Funds Service Company
("MFSC"), provides certain administrative services to the Fund. For such
services, MSAM pays Chase a portion of the fee MSAM receives from the Fund.
Prior to September 1, 1995, MFSC was an affiliate of United States Trust Company
of New York ("UST") and provided certain administrative services to the Fund
under the same terms as stated above.
D. Morgan Stanley Trust Company ("MSTC") acts as custodian for the Fund's assets
held outside the United States in accordance with a custodian agreement.
Custodian fees are computed and payable monthly based on securities held,
investment purchases and sales activity, an account maintenance fee, plus
reimbursement for certain out-of-pocket expenses. MSTC and the Adviser are
wholly-owned subsidiaries of Morgan Stanley Group, Inc.
- --------------------------------------------------------------------------------
153
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
Effective September 1, 1995, Chase replaced UST as custodian for the Fund's
assets held in the United States.
For the year ended December 31, 1995, the following Portfolios incurred custody
fees and had amounts due to MSTC at December 31, 1995 totaling:
<TABLE>
<CAPTION>
MSTC CUSTODY
FEES FEES PAYABLE TO
INCURRED MSTC
(000) (000)
------------- -----------------
<S> <C> <C>
Active Country Allocation..... $ 397 $ 70
Asian Equity.................. 466 111
Emerging Markets.............. 2,062 399
European Equity............... 44 11
Global Equity................. 40 11
Gold.......................... 9 1
International Equity.......... 532 141
International Small Cap....... 117 29
Japanese Equity............... 33 11
Latin American................ 104 27
Emerging Markets Debt......... 197 49
Global Fixed Income........... 36 9
</TABLE>
In addition, for the year ended December 31, 1995, the following Portfolios have
earned interest income and incurred interest expense on balances with MSTC as
follows:
<TABLE>
<CAPTION>
INTEREST INCOME INTEREST EXPENSE
(000) (000)
----------------- -------------------
<S> <C> <C>
Active Country
Allocation................ $ 29 $ 53
Asian Equity............... 58 17
Emerging Markets........... 42 69
European Equity............ 156 3
Global Equity.............. 9 1
International Equity....... 1,644 39
International Small Cap.... 84 6
Japanese Equity............ 2 13
Latin American............. 1 3
Emerging Markets Debt...... 38 94
Global Fixed Income........ 87 3
</TABLE>
At December 31, 1995, the Emerging Markets Portfolio owned shares of an
affiliated fund for which the Portfolio earned dividend income of $219,000.
E. During the year ended December 31, 1995, purchases and sales of investment
securities other than long-term U.S. Government securities and short-term
investments were:
<TABLE>
<CAPTION>
(000)
----------------------
PORTFOLIO PURCHASES SALES
- ---------------------------------------- ----------- ---------
<S> <C> <C>
Active Country Allocation............... $ 115,608 $ 155,753
Asian Equity............................ 116,591 114,296
Emerging Markets........................ 536,860 475,065
European Equity......................... 42,814 6,125
Global Equity........................... 22,401 38,489
Gold.................................... 8,137 32,525
International Equity.................... 472,776 364,466
International Small Cap................. 79,415 43,618
Japanese Equity......................... 88,100 29,619
Latin American.......................... 32,425 16,689
Aggressive Equity....................... 75,727 52,711
Emerging Growth......................... 31,159 66,673
Equity Growth........................... 246,443 231,522
Small Cap Value Equity.................. 19,861 16,332
U.S. Real Estate........................ 122,466 62,011
Value Equity............................ 92,679 46,530
Balanced................................ 4,611 5,122
Emerging Markets Debt................... 616,750 637,624
Fixed Income............................ 173,429 182,202
Global Fixed Income..................... 159,473 175,658
High Yield.............................. 58,042 95,389
Municipal Bond.......................... 118,467 74,955
</TABLE>
Purchases and sales during the year ended December 31, 1995 of long-term U.S.
Government securities occurred only in the Balanced, Fixed Income and Global
Fixed Income Portfolios and amounted to:
<TABLE>
<CAPTION>
(000)
----------------------
PORTFOLIO PURCHASES SALES
- ---------------------------------------- ----------- ---------
<S> <C> <C>
Balanced................................ $ 1,113 $ --
Fixed Income............................ 112,464 151,037
Global Fixed Income..................... 24,602 32,115
</TABLE>
During the year ended December 31, 1995, the following Portfolios incurred
brokerage commissions related to Morgan Stanley & Co., Incorporated, an
affiliated broker/dealer, of approximately:
<TABLE>
<CAPTION>
(000)
---------------
BROKERAGE
PORTFOLIO COMMISSION
- ----------------------------------------------- ---------------
<S> <C>
Asian Equity................................... $ 99
Emerging Markets............................... 69
European Equity................................ 4
Global Equity.................................. 3
Gold........................................... 1
International Equity........................... 69
International Small Cap........................ 1
Japanese Equity................................ 121
Latin American................................. 4
Equity Growth.................................. 1
U.S. Real Estate............................... 6
</TABLE>
- --------------------------------------------------------------------------------
154
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
F. At December 31, 1995, cost and unrealized appreciation (depreciation) for
U.S. Federal income tax purposes of the investments of each Portfolio were:
<TABLE>
<CAPTION>
(000)
--------------------------------------------
NET
APPREC.
PORTFOLIO COST APPREC. DEPREC. (DEPREC.)
- -------------------------- --------- --------- --------- -----------
<S> <C> <C> <C> <C>
Active Country
Allocation............... $ 150,104 $ 14,780 $ (4,620) $ 10,160
Asian Equity.............. 270,401 58,854 (16,312) 42,542
Emerging Markets.......... 915,174 97,063 (150,829) (53,766)
European Equity........... 65,638 5,746 (2,983) 2,763
Global Equity............. 68,989 11,625 (2,744) 8,881
Gold...................... 7,729 246 (651) (405)
International Equity...... 1,265,148 305,267 (31,924) 273,343
International Small Cap... 202,263 16,894 (24,355) (7,461)
Japanese Equity........... 114,012 4,851 (3,036) 1,815
Latin American............ 15,535 1,098 (1,194) (96)
Aggressive Equity......... 28,800 2,001 (314) 1,687
Emerging Growth........... 66,320 53,480 (542) 52,938
Equity Growth............. 142,804 17,849 (1,941) 15,908
Small Cap Value Equity.... 46,841 6,840 (1,886) 4,954
U.S. Real Estate.......... 65,257 5,625 (1,810) 3,815
Value Equity.............. 132,222 20,118 (5,352) 14,766
Balanced.................. 20,531 2,426 (526) 1,900
Emerging Markets Debt..... 173,477 12,534 (5,407) 7,127
Fixed Income.............. 155,055 8,025 (5) 8,020
Global Fixed Income....... 109,218 3,611 (262) 3,349
High Yield................ 62,766 2,929 (3,708) (779)
Municipal Bond............ 43,334 1,635 -- 1,635
Money Market.............. 836,431 -- -- --
Municipal Money Market.... 450,017 -- -- --
</TABLE>
At December 31, 1995, the following Portfolios had available capital loss
carryforwards to offset future net capital gains, to the extent provided by
regulations, through the indicated expiration dates:
<TABLE>
<CAPTION>
EXPIRATION DATE
DECEMBER 31,
(000)
-------------------------------
PORTFOLIO 2001 2002 2003 TOTAL
- ------------------------------- --- --------- --------- ---------
<S> <C> <C> <C> <C>
Emerging Markets............... $ -- $ -- $ 33,313 $ 33,313
Japanese Equity................ -- -- 2,666 2,666
Latin American................. -- -- 224 224
Fixed Income................... -- 8,291 -- 8,291
Global Fixed Income............ -- 5,293 1,780 7,073
High Yield..................... -- 497 4,145 4,642
Money Market................... -- 13 -- 13
Municipal Money Market......... 1 7 1 9
</TABLE>
During the year ended December 31, 1995, the International Small Cap, Emerging
Growth, Fixed Income and Money Market Portfolios utilized capital loss
carryforwards for U.S. Federal income tax purposes of approximately $1,764,000,
$10,861,000, $5,579,000 and $79,000, respectively.
To the extent that capital loss carryovers are used to offset any future net
capital gains realized during the carryover period as provided by U.S. Federal
income tax regulations, no capital gains tax liability will be incurred by a
Portfolio for gains realized and not distributed. It is unlikely that the gains
so offset would be distributed to shareholders.
Net capital and net currency losses incurred after October 31 and within the
taxable year are deemed to arise on the first business day of the Portfolio's
next taxable year. For the period from November 1, 1995 to December 31, 1995
certain Portfolios incurred and elected to defer until January 1, 1996 for U.S.
Federal income tax purposes net capital and net currency losses of
approximately:
<TABLE>
<CAPTION>
CAPITAL CURRENCY
LOSSES LOSSES
PORTFOLIO (000) (000)
- ------------------------------------------- ----------- -----------
<S> <C> <C>
Emerging Markets........................... $ -- $ 64
Global Equity.............................. -- 2
Latin American............................. 2 6
Emerging Markets Debt...................... 245 1,501
High Yield................................. 73 --
Municipal Money Market..................... 1 --
</TABLE>
G. During the year ended December 31, 1995, the following Portfolios wrote
covered call and put options as follows:
COVERED CALL OPTIONS
<TABLE>
<CAPTION>
NUMBER OF PREMIUM
AGGRESSIVE EQUITY PORTFOLIO CONTRACTS (000)
- ------------------------------------- ------------- -------------
<S> <C> <C>
Options outstanding at December 31,
1994................................ -- $ --
Options written during the period.... 386 39
Options cancelled in closing
transactions during the period...... (386) (39)
----- ---
Options outstanding at December 31,
1995................................ -- $ --
----- ---
----- ---
</TABLE>
<TABLE>
<CAPTION>
FACE AMOUNT PREMIUM
EMERGING MARKETS DEBT PORTFOLIO (000) (000)
- ----------------------------------- ------------- -----------
<S> <C> <C>
Options outstanding at December 31,
1994.............................. $ 15,000 $ 105
Options written during the
period............................ 69,900 1,281
Options cancelled in closing
transactions during the period.... (11,000) (240)
Options expired during the
period............................ (43,900) (508)
Options exercised during the
period............................ (30,000) (638)
------------- -----------
Options outstanding at December 31,
1995.............................. $ -- $ --
------------- -----------
------------- -----------
</TABLE>
COVERED PUT OPTIONS
<TABLE>
<CAPTION>
NUMBER OF PREMIUM
AGGRESSIVE EQUITY PORTFOLIO CONTRACTS (000)
- ------------------------------------- ------------- -------------
<S> <C> <C>
Options outstanding at December 31,
1994................................ -- $ --
Options written during the period.... 60 10
Options cancelled in closing
transactions during the period...... (60) (10)
--- ---
Options outstanding at December 31,
1995................................ -- $ --
--- ---
--- ---
</TABLE>
H. OTHER. At December 31, 1995, the net assets of certain Portfolios were
substantially comprised of foreign denominated securities and currency. Changes
in currency exchange rates will affect the U.S. dollar value of and investment
income from such securities.
- --------------------------------------------------------------------------------
155
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
During the year ended December 31, 1995, the Gold Portfolio realized losses from
in-kind redemptions of approximately $252,000.
Portfolio securities and foreign currency holdings were translated at the
following exchange rates as of December 31, 1995:
<TABLE>
<S> <C> <C> <C>
Argentine Peso........................ 1.00015 = $ 1.00
Australian Dollar..................... 1.34544 = $ 1.00
Belgian Franc......................... 29.43000 = $ 1.00
Brazilian Real........................ 0.97190 = $ 1.00
British Pound......................... 0.64412 = $ 1.00
Canadian Dollar....................... 1.36505 = $ 1.00
Colombian Peso........................ 990.75000 = $ 1.00
Danish Krone.......................... 5.55680 = $ 1.00
Deutsche Mark......................... 1.43390 = $ 1.00
Finnish Markka........................ 4.34955 = $ 1.00
French Franc.......................... 4.89700 = $ 1.00
Greek Drachma......................... 236.99000 = $ 1.00
Hong Kong Dollar...................... 7.73250 = $ 1.00
Hungarian Forint...................... 136.63000 = $ 1.00
Indonesian Rupiah..................... 2,286.50000 = $ 1.00
Irish Pound........................... 0.62441 = $ 1.00
Italian Lira.......................... 1,588.25000 = $ 1.00
Japanese Yen.......................... 103.25000 = $ 1.00
Korean Won............................ 775.75000 = $ 1.00
Malaysian Ringgit..................... 2.53970 = $ 1.00
Mexican Peso.......................... 7.69500 = $ 1.00
Moroccan Dirham....................... 8.46890 = $ 1.00
Netherlands Guilder................... 1.60470 = $ 1.00
New Zealand Dollar.................... 1.52964 = $ 1.00
Norwegian Krone....................... 6.32905 = $ 1.00
Pakistani Rupee....................... 34.21580 = $ 1.00
Peruvian New Sol...................... 2.31000 = $ 1.00
Philippine Peso....................... 26.23000 = $ 1.00
Polish Zloty.......................... 2.46550 = $ 1.00
Portuguese Escudo..................... 149.67500 = $ 1.00
Singapore Dollar...................... 1.41450 = $ 1.00
Spanish Peseta........................ 121.30000 = $ 1.00
Sri Lanka Rupee....................... 53.65000 = $ 1.00
Swedish Krona......................... 6.63965 = $ 1.00
Swiss Franc........................... 1.15350 = $ 1.00
Taiwan Dollar......................... 27.28700 = $ 1.00
Thai Baht............................. 25.19000 = $ 1.00
Turkish Lira.......................... 60,900.00000 = $ 1.00
</TABLE>
From time to time, certain Portfolios of the Fund have shareholders that hold a
significant portion of a Portfolio's outstanding shares. Investment activities
of these shareholders could have a material impact on those Portfolios.
I. SUBSEQUENT EVENT. On January 2, 1996, each Portfolio (with the exception of
the International Small Cap, Money Market and Municipal Money Market Portfolios)
began offering two classes of shares -- Class A and Class B. All the shares of
these Portfolios outstanding prior to January 2, 1996, were redesignated Class A
shares on January 2, 1996.
- --------------------------------------------------------------------------------
156
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of
Morgan Stanley Institutional Fund, Inc.
In our opinion, the accompanying statements of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
the Active Country Allocation Portfolio, Asian Equity Portfolio, Emerging
Markets Portfolio, European Equity Portfolio, Global Equity Portfolio, Gold
Portfolio, International Equity Portfolio, International Small Cap Portfolio,
Japanese Equity Portfolio, Latin American Portfolio, Aggressive Equity
Portfolio, Emerging Growth Portfolio, Equity Growth Portfolio, Small Cap Value
Equity Portfolio, U.S. Real Estate Portfolio, Value Equity Portfolio, Balanced
Portfolio, Emerging Markets Debt Portfolio, Fixed Income Portfolio, Global Fixed
Income Portfolio, High Yield Portfolio, Municipal Bond Portfolio, Money Market
Portfolio and Municipal Money Market Portfolio (constituting the Morgan Stanley
Institutional Fund, Inc., hereafter referred to as the "Fund") at December 31,
1995, the results of each of their operations, the changes in each of their net
assets and the financial highlights for the periods indicated, in conformity
with generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1995 by
correspondence with the custodians and counterparties and the application of
alternative auditing procedures where confirmations from counterparties were not
received, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
February 9, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
157
<PAGE>
PART C
Morgan Stanley Institutional Fund, Inc.
Other Information
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS
The Registrant's audited financial statements for the Money
Market, Municipal Money Market, Aggressive Equity, Emerging
Growth, Equity Growth, Value Equity, Small Cap Value Equity, U.S.
Real Estate, Balanced, Active Country Allocation, Global Equity,
International Equity, International Small Cap, European Equity,
Asian Equity, Emerging Markets, Gold, Japanese Equity, Latin
American, Emerging Markets Debt, Fixed Income, Global Fixed
Income, High Yield and Municipal Bond Portfolios, respectively,
for the fiscal year ended December 31, 1995, and Price Waterhouse
LLP's report thereon, are included in Part B (the Statement of
Additional Information) from the Registrant's December 31, 1995
Annual Report to Shareholders. Included in such financial
statements are the following:
1. Report of Independent Accountants
2. Statement of Net Assets at December 31, 1995
3. Statement of Operations for the period ended December 31,
1995
4. Statement of Changes in Net Assets for the respective
periods presented in the two year period ended December 31,
1995
5. Financial Highlights for the respective periods presented in
the five year period ended December 31, 1995
6. Notes to Financial Statements
(B) EXHIBITS
1 Articles of Amendment and Restatement are incorporated by reference to
Post-Effective Amendment No. 26 to the Registrant's Registration
Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as filed
with the SEC via EDGAR on October 13, 1995.
2 Amended and Restated By-laws are incorporated by reference to Post-
Effective Amendment No. 25 to the Registrant's Registration Statement
on Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the SEC
via EDGAR on August 1, 1995.
3 Not Applicable.
4 Registrant's Form of Specimen Security was previously filed and is
incorporated herein by reference.
5 (a) Investment Advisory Agreement between Registrant and Morgan
Stanley Asset Management Inc. is incorporated by reference to
Post-Effective Amendment No. 25 to the Registrant's Registration
Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as
filed with the SEC via EDGAR on August 1, 1995.
(b) Supplement to Investment Advisory Agreement between Registrant
and Morgan Stanley Asset Management Inc. (adding Registrant's
Equity, Balanced and Fixed Income Portfolios) is incorporated by
reference to Post-Effective Amendment No. 25 to the Registrant's
Registration Statement on Form N-1A (File Nos. 33-23166 and
811-5624), as filed with the SEC via EDGAR on August 1, 1995.
(c) Supplement to Investment Advisory Agreement between Registrant
and Morgan Stanley Asset Management Inc. (adding the Global
Equity, Global Fixed Income, European Equity and Equity
<PAGE>
Growth Portfolios) is incorporated by reference to Post-Effective
Amendment No. 25 to the Registrant's Registration Statement on
Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the
SEC via EDGAR on August 1, 1995.
(d) Supplement to Investment Advisory Agreement between Registrant
and Morgan Stanley Asset Management Inc. (adding the Asian Equity
Portfolio) is incorporated by reference to Post-Effective
Amendment No. 25 to the Registrant's Registration Statement on
Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the
SEC via EDGAR on August 1, 1995.
(e) Supplement to Investment Advisory Agreement between Registrant
and Morgan Stanley Asset Management Inc. (adding the Active
Country Allocation Portfolio) is incorporated by reference to
Post-Effective Amendment No. 25 to the Registrant's Registration
Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as
filed with the SEC via EDGAR on August 1, 1995.
(f) Supplement to Investment Advisory Agreement between Registrant
and Morgan Stanley Asset Management Inc. (adding the Emerging
Markets, High Yield and International Small Cap Portfolios) is
incorporated by reference to Post-Effective Amendment No. 25 to
the Registrant's Registration Statement on Form N-1A (File Nos.
33-23166 and 811-5624), as filed with the SEC via EDGAR on August
1, 1995.
(g) Supplement to Investment Advisory Agreement between Registrant
and Morgan Stanley Asset Management Inc. (adding the Small Cap
Value Equity Portfolio) is incorporated by reference to Post-
Effective Amendment No. 25 to the Registrant's Registration
Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as
filed with the SEC via EDGAR on August 1, 1995.
(h) Supplement to Investment Advisory Agreement between Registrant
and Morgan Stanley Asset Management Inc. (adding the Emerging
Markets Debt, Mortgage-Backed Securities, Municipal Bond and
Japanese Equity Portfolios) is incorporated by reference to
Post-Effective Amendment No. 25 to the Registrant's Registration
Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as
filed with the SEC via EDGAR on August 1, 1995.
(i) Sub-Advisory Agreement among Registrant, Morgan Stanley Asset
Management Inc. and Sun Valley Gold Company (with respect to the
Gold Portfolio) is incorporated by reference to Post-Effective
Amendment No. 25 to the Registrant's Registration Statement on
Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the
SEC via EDGAR on August 1, 1995.
(j) Supplement to Investment Advisory Agreement between Registrant
and Morgan Stanley Asset Management Inc. (adding the China Growth
Portfolio) is incorporated by reference to Post-Effective
Amendment No. 25 to the Registrant's Registration Statement on
Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the
SEC via EDGAR on August 1, 1995.
(k) Supplement to Investment Advisory Agreement between Registrant
and Morgan Stanley Asset Management Inc. (adding the Latin
American Portfolio) is incorporated by reference to Post-
Effective Amendment No. 25 to the Registrant's Registration
Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as
filed with the SEC via EDGAR on August 1, 1995.
(l) Supplement to Investment Advisory Agreement between Registrant
and Morgan Stanley Asset Management Inc. (adding the Contrarian
Portfolio) is incorporated by reference to Post-Effective
Amendment No. 25 to the Registrant's Registration Statement on
Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the
SEC via EDGAR on August 1, 1995.
(m) Supplement to Investment Advisory Agreement between Registrant
and Morgan Stanley Asset Management Inc. (adding the Aggressive
Equity and U.S. Real Estate Portfolios) is incorporated by
reference to Post-Effective Amendment No. 25 to the Registrant's
Registration Statement on Form N-1A (File Nos. 33-23166 and
811-5624), as filed with the SEC via EDGAR on August 1, 1995.
(n) Supplement to Investment Advisory Agreement between Registrant
and Morgan Stanley Asset Management, Inc. (adding the MicroCap
Portfolio) is incorporated by reference to Post-Effective
C-2
<PAGE>
Amendment No. 25 to the Registrant's Registration Statement on
Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the
SEC via EDGAR on August 1, 1995.
(o) Supplement to Investment Advisory Agreement between Registrant
and Morgan Stanley Asset Management, Inc. (adding the
International Magnum Portfolio) is incorporated by reference to
Post-Effective Amendment No. 28 to the Registrant's Registration
Statement on Form N1-A (File Nos. 33-23166 and 811-5624), as
filed with the SEC via EDGAR on November 3, 1995.
6 (a) Distribution Agreement between Registrant and Morgan Stanley &
Co. Incorporated is incorporated by reference to Post-Effective
Amendment No. 25 to the Registrant's Registration Statement on
Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the
SEC via EDGAR on August 1, 1995.
(b) Supplement to Distribution Agreement between Registrant and
Morgan Stanley & Co. Incorporated, filed herewith.
8 (a) Mutual Fund Custody Agreement (Domestic Custody Agreement)
between Registrant and United States Trust Company of New York
dated March 10, 1994 is incorporated by reference to Post-
Effective Amendment No. 25 to the Registrant's Registration
Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as
filed with the SEC via EDGAR on August 1, 1995.
(b) Registrant's Custody Agreement (International), dated July 31,
1989, as amended on [____________, 1995] is incorporated by
reference to Post-Effective Amendment No. 25 to the Registrant's
Registration Statement on Form N-1A (File Nos. 33-23166 and
811-5624), as filed with the SEC via EDGAR on August 1, 1995.
9 (a) Administration Agreement between Registrant and Morgan Stanley
Asset Management Inc. (the "MSAM Administration Agreement") is
incorporated by reference to Post-Effective Amendment No. 25 to
the Registrant's Registration Statement on Form N-1A (File Nos.
33-23166 and 811-5624), as filed with the SEC via EDGAR on August
1, 1995.
(b) U.S. Trust Administration Agreement is incorporated by reference
to Post-Effective Amendment No. 25 to the Registrant's
Registration Statement on Form N-1A (File Nos. 33-23166 and
811-5624), as filed with the SEC via EDGAR on August 1, 1995.
10 Opinion of Counsel is incorporated by reference to Post-Effective
Amendment No. 25 to the Registrant's Registration Statement on Form
N-1A (File Nos. 33-23166 and 811-5624), as filed with the SEC via
EDGAR on August 1, 1995.
11 Consent of Independent Accountants, filed herewith.
13 Purchase Agreement is incorporated by reference to Post-Effective
Amendment No. 25 to the Registrant's Registration Statement on Form
N-1A (File Nos. 33-23166 and 811-5624), as filed with the SEC via
EDGAR on August 1, 1995.
15 Form of Plan of Distribution Pursuant to Rule 12b-1 for Class B Shares
(the "Class B Plan") of the Active Country Allocation Portfolio is
incorporated by reference to Post-Effective Amendment No. 27 to the
Registrant's Registration Statement on Form N-1A (File Nos. 33-23166
and 811-5624), as filed with the SEC via EDGAR on November 1, 1995.
The following Class B Plans have been omitted because they are
substantially identical to the one filed herewith. The omitted Class
B Plans differ from the Class B Plan filed herewith only in references
to the portfolio to which the Class B Plan relates: Fixed Income,
Global Fixed Income, Municipal Bond, Mortgage-Backed Securities, High
Yield, Money Market, Municipal Money Market, Small Cap Value Equity,
Value Equity, Balanced, Gold, Global Equity, International Equity,
International Small Cap, Asian Equity, European Equity, Japanese
Equity, Latin American, Emerging Markets, Emerging Markets Debt, China
Growth, Equity Growth, Emerging Growth, MicroCap, Aggressive Equity,
U.S. Real Estate and International Magnum Portfolios.
C-3
<PAGE>
16 Schedule of Computation of Performance Information is incorporated by
reference to Post-Effective Amendment No. 25 to the Registrant's
Registration Statement on Form N-1A (File Nos. 33-23166 and 811-5624),
as filed with the SEC via EDGAR on August 1, 1995.
19 Registrant's Rule 18F-3 Multiple Class Plan is incorporated by
reference to Post-Effective Amendment No. 27 to the Registrant's
Registration Statement on Form N-1A (File Nos. 33-23166 and 811-5624),
as filed with the SEC via EDGAR on November 1, 1995.
24 Powers of Attorney are incorporated by reference to Post-Effective
Amendment No. 25 to the Registrant's Registration Statement on Form
N-1A (File Nos. 33-23166 and 811-5624), as filed with the SEC via
EDGAR on August 1, 1995.
27 Financial Data Schedules for the fiscal year ended December 31, 1995
for Registrant's portfolios in operation during such periods (See
Item 24(A)), filed herewith.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Registrant is not controlled by or under common control with any
person.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES (ON MARCH 29, 1996)
Active Country Allocation Portfolio
Class A........................................................63
Class B........................................................28
Aggressive Equity Portfolio
Class A.......................................................114
Class B........................................................67
Asian Equity Portfolio
Class A.......................................................928
Class B.......................................................246
Balanced Portfolio
Class A........................................................53
Class B........................................................63
Emerging Growth Portfolio
Class A.......................................................489
Class B.......................................................158
Emerging Markets Portfolio
Class A......................................................1107
Class B.......................................................236
Equity Growth Portfolio
Class A.......................................................498
Class B.......................................................105
Fixed Income Portfolio
Class A.......................................................287
Class B........................................................63
Global Equity Portfolio
Class A........................................................22
Class B........................................................50
Global Fixed Income Portfolio
Class A........................................................88
Class B........................................................52
High Yield Portfolio
Class A.......................................................381
Class B........................................................68
International Equity Portfolio
Class A.......................................................308
Class B.......................................................142
C-4
<PAGE>
International Small Cap Portfolio
Class A.......................................................151
Latin American Portfolio
Class A.......................................................491
Class B........................................................18
Money Market Portfolio
Class A.......................................................513
Municipal Money Market Portfolio
Class A.......................................................331
Small Cap Value Equity Portfolio
Class A.......................................................447
Class B........................................................45
U.S. Real Estate Portfolio
Class A.......................................................479
Class B........................................................55
Value Equity Portfolio
Class A.......................................................476
Class B........................................................67
European Equity Portfolio
Class A.......................................................594
Class B........................................................34
Municipal Bond Portfolio
Class A.......................................................109
Class B.........................................................3
Mortgage-Backed Securities Portfolio
Class A.........................................................0
Class B.........................................................0
Japanese Equity Portfolio
Class A.......................................................660
Class B........................................................74
Emerging Markets Debt Portfolio
Class A.......................................................563
Class B........................................................62
Gold Portfolio
Class A........................................................45
Class B.........................................................9
China Growth Portfolio
Class A.........................................................0
Class B.........................................................0
MicroCap Portfolio
Class A.........................................................0
Class B.........................................................0
International Magnum Portfolio
Class A.........................................................3
Class B.........................................................0
ITEM 27. INDEMNIFICATION
Reference is made to Article TEN of the Registrant's Articles of
Incorporation. Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to trustees, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a trustee, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
C-5
<PAGE>
ITEM 28. BUSINESS AND OTHER CONNECTIONS WITH INVESTMENT ADVISER
Reference is made to the caption "The Investment Adviser" in the
Prospectus constituting Part A of this Registration Statement and "Investment
Advisory Services" in Part B of Registration Statement.
Listed below are the officers and Directors of Morgan Stanley Asset
Management Inc. ("MSAM"). The information as to any other business, profession,
vocation, or employment of substantial nature engaged in by the Chairman,
President and Directors during the past two fiscal years, is incorporated by
reference to Schedules A and D of Form ADV filed by MSAM pursuant to the
Advisers Act (SEC File No. 801-15757).
DIRECTORS:
James M. Allwin Director
Barton M. Biggs Director
Gordon S. Gray Director
Peter A. Nadosy Director
Dennis G. Sherva Director
OFFICERS:
Barton M Biggs Chairman
Peter A. Nadosy Vice Chairman
James M. Allwin President - Managing Director
Barton M. Biggs Managing Director
P. Dominic Caldecott Managing Director (MSAM) - UK
A. Macdonald Caputo Managing Director
Ean Wah Chin Managing Director (MSAM) - Singapore
Garry B. Crowder Managing Director
Michael A. Crowe Managing Director
Madhav Dhar Managing Director
Kurt A. Feuerman Managing Director
Gordon S. Gray Managing Director
Gary D. Latainer Managing Director
Peter A. Nadosy Managing Director
Dennis G. Shorva Managing Director
Richard G. Woolworth, Jr. Managing Director
Warren Ackerman III Principal
John R. Alkire Principal (MSAM) - Tokyo
Robert E. Angevine Principal
Gerald P. Barth-Wehrenalp Principal
Francine J. Bovich Principal
Stuart J. M. Breslow Principal
Terence P. Carmichael Principal
Arthur Certosimo Principal
James K. K. Cheng Principal (MSAM) - Singapore
Stephen C. Cordy Principal
Jacqueline A. Day Principal (MSAM) - UK
Paul B. Ghaffari Principal
James Wayne Grisham Principal
Perry E. Hall II Principal
Marianne Laing Hay Principal (MSAM) - UK
Margaret Kinsley Johnson Principal
Kathryn Jonas Kasanoff Principal
Debra A. F. Kushma Principal
Marianne J. Lippamnn Principal
Gary J. Mangino Principal
M. Paul Martin Principal
Walter Maynard, Jr. Principal
C-6
<PAGE>
Robert L. Meyer Principal
Margaret P. Naylor Principal (MSAM) - UK
Warren Olsen Principal
Christopher G. Petrow Principal
Russell C. Platt Principal
Gail Hunt Reeke Principal
Christine I. Reilly Principal
Bruce R. Sandberg Principal
Robert A. Sargent Principal (MSAM) - UK
Harold J. Schaaff, Jr. Principal
Kiat Seng Scah Principal (MSAM) - Singapore
Vinod R. Sethl Principal
Stephen C. Sexauer Principal
Robert M. Smith Principal
Philip W. Winters Principal
Alford E. Zick, Jr. Principal
Marshall T. Bassett Vice President
L. Kenneth Brooks Vice President
Andrew C. Brown Vice President (MSAM) - UK
Frances Campion Vice President (MSAM) - UK
Carl Kuo-Wei Chien Vice President (MSAM) - Hong Kong
Lori A. Cohane Vice President
James Colmenares Vice President
Kate Cornish-Bowden Vice President (MSAM) - UK
Bertrand Le Pan De Ligny Vice President (MSAM) - UK
Christine H. du Bois Vice President
Raye L. Dube Vice President
Abigail Jones Feder Vice President
Josephine M. Glass Vice President
Maureen A. Grover Vice President
Kenneth R. Holley Vice President
Nan B. Levy Vice President
Valerie Y. Lewis Vice President
Gordon W. Loory Vice President
Yvonne Longley Vice President (MSAM) - UK
Jeffrey Margolis Vice President
Paula J. Morgan Vice President (MSAM) - UK
Clare K. Mutone Vice President
Martin O. Pearce Vice President
Alexander A. Pena Vice President
Anthony J. Pesce Vice President
David J. Polansky Vice President
Donald P. Ryan Vice President
Michael James Smith Vice President (MSAM) - UK
Kim I. Spellman Vice President
Joseph P. Stadler Vice President
Christian K. Stadlinger Vice President
Catherine Steinhardt Vice President
Kunihiko Sugio Vice President (MSAM) - Tokyo
Joseph Y.S. Tern Vice President (MSAM) - Singapore
Ann D. Thiviergo Vice President
Richard Boon Hwee Toh Vice President (MSAM) - Singapore
K.N. Vaidyanathan Vice President (MSAM) - Bombay
Kevin V. Wasp Vice President
Harold J. Schaaff, Jr. General Counsel and Secretary
Madeline D. Barkhorn Assistant Secretary
Charlene R. Herzer Assistant Secretary
Charles R. Hintz Treasurer
C-7
<PAGE>
In addition, MSAM acts as investment adviser to the following registered
investment companies: American Advantage International Equity Fund; The
Brazilian Investment Fund, Inc.; certain portfolios of The Enterprise Group of
Funds, Inc.; Fountain Square International Equity Fund; General American Capital
Co.; The Latin American Discovery Fund, Inc., certain portfolios of The Legends
Fund, Inc.; The Malaysia Fund, Inc.; Morgan Stanley Africa Investment Fund,
Inc.; Morgan Stanley Asia-Pacific Fund, Inc.; Morgan Stanley Emerging Markets
Debt Fund, Inc.; Morgan Stanley Emerging Markets Fund, Inc.; all funds of the
Morgan Stanley Fund, Inc.; Morgan Stanley Global Opportunity Bond Fund, Inc.;
The Morgan Stanley High Yield Fund, Inc.; Morgan Stanley India Investment Fund,
Inc.; The Pakistan Investment Fund, Inc.; PCS Cash Fund, Inc.; The Thai Fund,
Inc., The Turkish Investment Fund, Inc.; Principal Aggressive Growth Fund, Inc.;
Principal Asset Allocation Fund, Inc. and Sun America Series Trust.
ITEM 29. PRINCIPAL UNDERWRITERS
Morgan Stanley & Co. Incorporated ("MS&Co.") is distributor for Morgan
Stanley Institutional Fund, Inc., Morgan Stanley Fund, Inc. and PCS Cash Fund,
Inc. The information required by this Item 29 with respect to each Director and
officer of MS&Co. is incorporated by reference to Schedule A of Form BD filed by
MS&Co. pursuant to the Securities and Exchange Act of 1934 (SEC File No.
8-15869).
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The books, accounts and other documents required by Section 31(a) under the
Investment Company Act of 1940 and the rules promulgated thereunder are
maintained in the physical possession of the Registrant; Registrant's Transfer
Agent, Chase Global Funds Services Company, P.O. Box 2798, Boston, Massachusetts
02208-2798; MSAM; MS&Co.; and the Registrant's custodian banks, including
sub-custodians.
ITEM 31. MANAGEMENT SERVICES
The Registrant has entered into a Service Agreement with The Chase
Manhattan Bank, N.A., successor in interest to United States Trust Company of
New York, which was filed as Exhibit No. 9(b) to Post-Effective Amendment No. 25
to the Fund's Registration Statement and is incorporated herein by reference.
ITEM 32. UNDERTAKINGS
1. Registrant hereby undertakes to file a post-effective amendment
containing reasonably current financial statements, which need not be certified,
for the International Magnum and MicroCap Portfolios within four to six months
of their effective date or the commencement of operations, whichever is later.
2. Registrant hereby undertakes that whenever a Shareholder or
Shareholders who meet the requirements of Section 16(c) of the Investment
Company Act of 1940 inform the Board of Directors of his or their desire to
communicate with other Shareholders of the Fund, the Directors will inform such
Shareholder(s) as to the approximate number of Shareholders of record and the
approximate costs of mailing or afford said Shareholders access to a list of
Shareholders.
C-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Amendment to its Registration
Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly
caused this Amendment to its Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of New York and State
of New York, on April 25, 1996.
MORGAN STANLEY INSTITUTIONAL FUND, INC.
By: /s/ WARREN J. OLSEN
---------------------
Warren J. Olsen
President and Director
Pursuant to the requirements of the Securities Act of 1933, this
amendment to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/S/ WARREN J. OLSEN Director, President April 25, 1996
- ------------------- (Principal Executive
Warren J. Olsen Officer)
*/S/ BARTON M. BIGGS Director (Chairman) April 25, 1996
- -------------------
Barton M. Biggs
*/S/ FERGUS REID
- ------------------- Director April 25, 1996
Fergus Reid
*/S/ FREDERICK O. ROBERTSHAW Director April 25, 1996
- -------------------
Frederick O. Robertshaw
*/S/ ANDREW MCNALLY IV Director April 25, 1996
- -------------------
Andrew McNally IV
*/S/ JOHN D. BARRETT II Director April 25, 1996
- -------------------
John D. Barrett II
*/S/ GERARD E. JONES Director April 25, 1996
- -------------------
Gerard E. Jones
*/S/ SAMUEL T. REEVES Director April 25, 1996
- -------------------
Samuel T. Reeves
*/S/ FREDERICK B. WHITTEMORE Director April 25, 1996
- -------------------
Frederick B. Whittemore
*/S/ JAMES R. ROONEY Treasurer April 25, 1996
- ------------------ (Principal
James R. Rooney Accounting
Officer)
*By:/S/ WARREN J. OLSEN
--------------------
Warren J. Olsen
Attorney-In-Fact
<PAGE>
EXHIBIT INDEX
EDGAR
Exhibit
Number Description
EX-99.B 1 Articles of Amendment and Restatement are incorporated by
reference to Post-Effective Amendment No. 26 to the Registrant's
Registration Statement on Form N-1A (File Nos. 33-23166 and
811-5624), as filed with the SEC via EDGAR on October 13, 1995.
EX-99.B 2 Amended and Restated By-laws are incorporated by reference to
Post-Effective Amendment No. 25 to the Registrant's Registration
Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as
filed with the SEC via EDGAR on August 1, 1995.
4 Registrant's Form of Specimen Security was previously filed and is
incorporated herein by reference.
EX-99.B 5 (a) Investment Advisory Agreement between Registrant and Morgan
Stanley Asset Management Inc. is incorporated by reference
to Post-Effective Amendment No. 25 to the Registrant's
Registration Statement on Form N-1A (File Nos. 33-23166 and
811-5624), as filed with the SEC via EDGAR on August 1,
1995.
EX-99.B 5 (b) Supplement to Investment Advisory Agreement between
Registrant and Morgan Stanley Asset Management Inc. (adding
Registrant's Equity, Balanced and Fixed Income Portfolios)
is incorporated by reference to Post-Effective Amendment No.
25 to the Registrant's Registration Statement on Form N-1A
(File Nos. 33-23166 and 811-5624), as filed with the SEC via
EDGAR on August 1, 1995.
EX-99.B 5 (c) Supplement to Investment Advisory Agreement between
Registrant and Morgan Stanley Asset Management Inc. (adding
the Global Equity, Global Fixed Income, European Equity and
Equity Growth Portfolios) is incorporated by reference to
Post-Effective Amendment No. 25 to the Registrant's
Registration Statement on Form N-1A (File Nos. 33-23166 and
811-5624), as filed with the SEC via EDGAR on August 1,
1995.
EX-99.B 5 (d) Supplement to Investment Advisory Agreement between
Registrant and Morgan Stanley Asset Management Inc. (adding
the Asian Equity Portfolio) is incorporated by reference to
Post-Effective Amendment No. 25 to the Registrant's
Registration Statement on Form N-1A (File Nos. 33-23166 and
811-5624), as filed with the SEC via EDGAR on August 1,
1995.
EX-99.B 5 (e) Supplement to Investment Advisory Agreement between
Registrant and Morgan Stanley Asset Management Inc. (adding
the Active Country Allocation Portfolio) is incorporated by
reference to Post-Effective Amendment No. 25 to the
Registrant's Registration Statement on Form N-1A (File Nos.
33-23166 and 811-5624), as filed with the SEC via EDGAR on
August 1, 1995.
<PAGE>
EX-99.B 5 (f) Supplement to Investment Advisory Agreement between
Registrant and Morgan Stanley Asset Management Inc. (adding
the Emerging Markets, High Yield and International Small Cap
Portfolios) is incorporated by reference to Post-Effective
Amendment No. 25 to the Registrant's Registration Statement
on Form N-1A (File Nos. 33-23166 and 811-5624), as filed
with the SEC via EDGAR on August 1, 1995.
EX-99.B 5 (g) Supplement to Investment Advisory Agreement between
Registrant and Morgan Stanley Asset Management Inc. (adding
the Small Cap Value Equity Portfolio) is incorporated by
reference to Post-Effective Amendment No. 25 to the
Registrant's Registration Statement on Form N-1A (File Nos.
33-23166 and 811-5624), as filed with the SEC via EDGAR on
August 1, 1995.
EX-99.B 5 (h) Supplement to Investment Advisory Agreement between
Registrant and Morgan Stanley Asset Management Inc. (adding
the Emerging Markets Debt, Mortgage-Backed Securities,
Municipal Bond and Japanese Equity Portfolios) is
incorporated by reference to Post-Effective Amendment No. 25
to the Registrant's Registration Statement on Form N-1A
(File Nos. 33-23166 and 811-5624), as filed with the SEC via
EDGAR on August 1, 1995.
EX-99.B 5 (i) Sub-Advisory Agreement among Registrant, Morgan Stanley
Asset Management Inc. and Sun Valley Gold Company (with
respect to the Gold Portfolio) is incorporated by reference
to Post-Effective Amendment No. 25 to the Registrant's
Registration Statement on Form N-1A (File Nos. 33-23166 and
811-5624), as filed with the SEC via EDGAR on August 1,
1995.
EX-99.B 5 (j) Supplement to Investment Advisory Agreement between
Registrant and Morgan Stanley Asset Management Inc. (adding
the China Growth Portfolio) is incorporated by reference to
Post-Effective Amendment No. 25 to the Registrant's
Registration Statement on Form N-1A (File Nos. 33-23166 and
811-5624), as filed with the SEC via EDGAR on August 1,
1995.
EX-99.B 5 (k) Supplement to Investment Advisory Agreement between
Registrant and Morgan Stanley Asset Management Inc. (adding
the Latin American Portfolio) is incorporated by reference
to Post-Effective Amendment No. 25 to the Registrant's
Registration Statement on Form N-1A (File Nos. 33-23166 and
811-5624), as filed with the SEC via EDGAR on August 1,
1995.
EX-99.B 5 (l) Supplement to Investment Advisory Agreement between
Registrant and Morgan Stanley Asset Management Inc. (adding
the Contrarian Portfolio) is incorporated by reference to
Post-Effective Amendment No. 25 to the Registrant's
Registration Statement on Form N-1A (File Nos. 33-23166 and
811-5624), as filed with the SEC via EDGAR on August 1,
1995.
EX-99.B 5 (m) Supplement to Investment Advisory Agreement between
Registrant and Morgan Stanley Asset Management Inc. (adding
the Aggressive Equity and U.S. Real Estate Portfolios) is
incorporated by reference to Post-Effective Amendment No. 25
to the Registrant's Registration Statement
2
<PAGE>
on Form N-1A (File Nos. 33-23166 and 811-5624), as filed
with the SEC via EDGAR on August 1, 1995.
EX-99.B 5 (n) Supplement to Investment Advisory Agreement between
Registrant and Morgan Stanley Asset Management, Inc. (adding
the MicroCap Portfolio) is incorporated by reference to
Post-Effective Amendment No. 25 to the Registrant's
Registration Statement on Form N-1A (File Nos. 33-23166 and
811-5624), as filed with the SEC via EDGAR on August 1,
1995.
EX-99.B 5 (o) Supplement to Investment Advisory Agreement between
Registrant and Morgan Stanley Asset Management, Inc. (adding
the International Magnum Portfolio) is incorporated by
reference to Post-Effective Amendment No. 28 to the
Registrant's Registration Statement on Form N-1A (File Nos.
33-23166 and 811-5624), as filed with the SEC via EDGAR on
November 3, 1995.
EX-99.B 6 (a) Distribution Agreement between Registrant and Morgan Stanley
& Co. Incorporated is incorporated by reference to Post-
Effective Amendment No. 25 to the Registrant's Registration
Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as
filed with the SEC via EDGAR on August 1, 1995.
EX-99.B 6 (b) Supplement to Distribution Agreement between Registrant and
Morgan Stanley & Co. Incorporated, filed herewith.
EX-99.B 8 (a) Mutual Fund Custody Agreement (Domestic Custody Agreement)
between Registrant and United States Trust Company of New
York dated March 10, 1994 is incorporated by reference to
Post-Effective Amendment No. 25 to the Registrant's
Registration Statement on Form N-1A (File Nos. 33-23166 and
811-5624), as filed with the SEC via EDGAR on August 1,
1995.
EX-99.B 8 (b) Registrant's Custody Agreement (International), dated July
31, 1989, as amended on [_____________, 1995] is
incorporated by reference to Post-Effective Amendment No. 25
to the Registrant's Registration Statement on Form N-1A
(File Nos. 33-23166 and 811-5624), as filed with the SEC via
EDGAR on August 1, 1995.
EX-99.B 9 (a) Administration Agreement between Registrant and Morgan
Stanley Asset Management Inc. (the "MSAM Administration
Agreement") is incorporated by reference to Post-Effective
Amendment No. 25 to the Registrant's Registration Statement
on Form N-1A (File Nos. 33-23166 and 811-5624), as filed
with the SEC via EDGAR on August 1, 1995.
EX-99.B 9 (b) U.S. Trust Administration Agreement is incorporated by
reference to Post-Effective Amendment No. 25 to the
Registrant's Registration Statement on Form N-1A (File Nos.
33-23166 and 811-5624), as filed with the SEC via EDGAR on
August 1, 1995.
EX-99.B 10 Opinion of Counsel is incorporated by reference to Post-
Effective Amendment No. 25 to the Registrant's Registration
Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as
filed with the SEC via EDGAR on August 1, 1995.
3
<PAGE>
EX-99.B 11 Consent of Independent Accountants, filed herewith.
EX-99.B 13 Purchase Agreement is incorporated by reference to Post-
Effective Amendment No. 25 to the Registrant's Registration
Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as
filed with the SEC via EDGAR on August 1, 1995.
EX-99.B 15 Form of Plan of Distribution Pursuant to Rule 12b-1 for
Class B Shares (the "Class B Plan") of the Active Country
Allocation Portfolio is incorporated by reference to Post-
Effective Amendment No. 27 to the Registrant's Registration
Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as
filed with the SEC via EDGAR on November 1, 1995. The
following Class B Plans have been omitted because they are
substantially identical to the one filed herewith. The
omitted Class B Plans differ from the Class B Plan filed
herewith only in references to the portfolio to which the
Class B Plan relates: Fixed Income, Global Fixed Income,
Municipal Bond, Mortgage-Backed Securities, High Yield,
Money Market, Municipal Money Market, Small Cap Value
Equity, Value Equity, Balanced, Gold, Global Equity,
International Equity, International Small Cap, Asian Equity,
European Equity, Japanese Equity, Latin American, Emerging
Markets, Emerging Markets Debt, China Growth, Equity Growth,
Emerging Growth, MicroCap, Aggressive Equity, U.S. Real
Estate and International Magnum Portfolios.
EX-99.B 16 Schedule of Computation of Performance Information is
incorporated by reference to Post-Effective Amendment No. 25
to the Registrant's Registration Statement on Form N-1A
(File Nos. 33-23166 and 811-5624), as filed with the SEC via
EDGAR on August 1, 1995.
EX-99.B 19 Registrant's Rule 18F-3 Multiple Class Plan is incorporated
by reference to Post-Effective Amendment No. 27 to the
Registrant's Registration Statement on Form N-1A (File Nos.
33-23166 and 811-5624), as filed with the SEC via EDGAR on
November 1, 1995.
EX-99.B 24 Powers of Attorney are incorporated by reference to Post-
Effective Amendment No. 25 to the Registrant's Registration
Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as
filed with the SEC via EDGAR on August 1, 1995.
EX-99.B 27 Financial Data Schedules for the fiscal year ended December
31, 1995 for Registrant's portfolios in operation during such
periods (See Item 24(A)), filed herewith.
4
<PAGE>
EXHIBIT 6(b)
SUPPLEMENT TO DISTRIBUTION AGREEMENT
OF
MORGAN STANLEY INSTITUTIONAL FUND, INC.
(CLASS B SHARES)
Supplement dated as of December 18, 1995, (the "Supplement") to
Distribution Agreement dated as of October 1, 1988 (the "Agreement") among
Morgan Stanley Institutional Fund, Inc., a Maryland corporation (the "Fund"),
and Morgan Stanley & Co. Incorporated, a Delaware corporation (the
"Distributor").
RECITALS
The Fund has executed and delivered a Distribution Agreement,
dated as of October 1, 1988, between the Fund and the Distributor. The
Agreement appoints the Distributor in connection with the offering and sale of
the shares of common stock, par value $0.001, of the Fund and sets forth the
rights and obligations of the parties with respect to the distribution of the
shares.
AGREEMENTS
NOW, therefore, the parties agree that the rights and obligations
set forth in the Distribution Agreement shall be applicable to the Class B
Shares of the Fund and that with respect to such shares, the Agreement is
amended and supplemented by the following:
COMPENSATION
For the services to be rendered and the expenses assumed by
the Distributor with respect to the Class B Shares, the Fund
shall pay to the Distributor, compensation at the annual rate of
.25% of the average daily net assets of the Class B Shares.
Except as hereinafter set forth, continuing compensation under
this Agreement shall be calculated and accrued daily and the
amounts of the daily accruals shall be paid monthly in arrears
within ten days after the end of the month. If this Agreement
becomes effective subsequent to the first day of a month or shall
terminate before the last day of a month, compensation for that
part of the month this Agreement is in effect shall be prorated
in a manner consistent with the calculations of the fees as set
forth above. Payment of the Distributor's compensation for the
preceding month shall be made as promptly as possible, but in no
event later than ten days after the end of the month.
This Supplement may be executed in any number of counterparts,
each of which so executed shall be deemed to be an original, but all such
counterparts shall together constitute but one and the same instrument.
The parties listed below have executed this Supplement as of
December 18, 1995.
MORGAN STANLEY & CO. INCORPORATED
By: /s/ Warren J. Olsen
------------------------------------
Name:
Title: Principal
MORGAN STANLEY INSTITUTIONAL FUND, INC.
By: /s/ Warren J. Olsen
------------------------------------
Name:
Title: Director and President
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 29 to the registration
on Form N-1A (the "Registration Statement") of our report dated February 9,
1996, relating to the financial statements and financial highlights of Morgan
Stanley Institutional Fund, Inc., which appears in such Statement of
Additional Information, and the incorporation by reference of our report into
the Prospectuses which constitute parts of this Registration Statement. We
also consent to the references to us under the heading "Financial Statements"
in such Statement of Additional Information and the references to us under
the headings "Financial Highlights", where applicable, and "Independent
Accountants" in such Prospectuses.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
April 22, 1996
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